Shareholders can borrow money from their company, often referred to as a shareholder loan or director’s loan. However, there are important legal, accounting, and tax issues to consider, particularly under Division 7A rules.
This article explains what a shareholder loan is, when Division 7A may apply, the deadlines for repaying or documenting a loan, and what to consider before borrowing from your company.
Note: A shareholder loan in Australia should not be treated as a substitute for dividends (or, if you are also a director or employee, salary or director’s fees). If you are deciding how to withdraw money from your company, see Lawpath’s guide on how to pay yourself as a company director.
Shareholder loan
Generally speaking, if done properly, you will not need to pay tax on a shareholder loan. However, it is important to distinguish a ‘loan’ from a ‘payment’ for Division 7A of the Income Tax Assessment Act 1936 (Cth) (Act). In the latter case, you may be subject to fringe benefit tax charge(s).
Division 7A specifically applies to certain payments, loans, and debt forgiveness by a private company to a shareholder or their associate. It is most relevant where the borrower is a shareholder of the company, but it can also apply to an associate of a shareholder, which can include a director who holds no shares.
Under the act, a loan means:
- An advance of money
- The provision of credit or some other form of financing
- A transaction that is the same as a monetary loan
For example, a company loans a shareholder $10,000, which must be paid back. As an advance of money, it is a loan for the purposes of the Act.
For the loan to comply with the Act and be tax-exempt, the following conditions must be met:
- The loan must be agreed on in writing (as outlined in the next section)
- The loan interest rate must be at least equal to the Division 7A benchmark interest rate
- The maximum term must not exceed:
- 7 years; or
- 25 years where the whole of the loan secured is by a mortgage over real property, and the market value of the property at the time of the loan agreement is at least 110% of the loan amount.
How it works
Firstly, the shareholder loan should be properly authorised and recorded. Depending on the company’s constitution, the transaction, the parties involved, and the amount borrowed, this may involve board approval, shareholder approval, or both.
The process goes something like this:
Company advances funds → Repay or formalise the amount before the company’s lodgment day → Make the first minimum yearly repayment in the following income year → Continue making minimum yearly repayments each year until the loan is repaid
You also need to ensure the loan is dealt with correctly for Division 7A purposes. Two separate deadlines are particularly important.
Before the company’s lodgment day
For the income year in which the company advances the funds, the amount generally needs to be either:
- Repaid in full; or
- Put under a complying written Division 7A loan agreement.
The company’s lodgment day is the earlier of:
- The date the company actually lodges its income tax return; and
- The due date for lodging that tax return.
This is not automatically 30 June. In many cases, a company’s lodgment day will fall after the end of the relevant income year, depending on when the company’s tax return is due and when it is actually lodged.
By 30 June in later income years
If your loan is subject to Division 7A, you generally need to make a minimum yearly loan repayment by the end of each income year (typically 30 June, if that is your company’s year-end). Note that your first repayment is usually due in the income year after you received the loan.
What is the Division 7A benchmark interest rate for 2026–27?
For the 2026–27 income year, the Division 7A benchmark interest rate is 8.77%. This is up from 8.37% for the 2025–26 income year. The ATO publishes the benchmark interest rate each year.
| Income year | Division 7A benchmark rate |
|---|---|
| 2025–26 | 8.37% |
| 2026–27 | 8.77% |
This interest rate applies to all existing complying Division 7A loans for the relevant income year, not just to new loans established during that year.
What is the minimum yearly repayment on a Division 7A loan?
A complying Division 7A loan is not simply a matter of documenting the debt once. Minimum yearly repayments must generally continue throughout the loan term.
The repayment:
- Includes both principal and interest
- Depends on the outstanding balance of the loan
- Depends on the remaining loan term
- Uses the applicable benchmark interest rate for the relevant income year
- Is generally due by 30 June for a company with a standard 30 June income year
If the borrower fails to make the required minimum annual repayment, Division 7A may treat the shortfall as a deemed dividend.
Example: A shareholder takes $20,000 from their private company during the 2026–27 income year. Before the company’s lodgment day for that year, the amount must generally be repaid or placed under a complying Division 7A loan agreement. If it becomes a complying loan, minimum yearly repayment obligations should begin in the following income year.
Rather than attempting to calculate the repayment manually, use the ATO’s Division 7A calculator and decision tool.
What happens if you get it wrong?
If the Division 7A requirements are not met, the affected amount may be treated as an unfranked deemed dividend.
For example:
- If you don’t have a valid loan agreement and haven’t repaid the money by the company’s tax deadline, the unpaid amount might be treated as a taxable dividend, depending on relevant rules.
- If you have a valid loan but miss a yearly repayment, only the missed amount is generally affected, rather than the entire loan balance.
Division 7A consequences can depend on the company’s records, the timing of payments, the borrower’s relationship to the company, the company’s distributable surplus, and whether any exclusions or ATO discretion apply.
What to consider
Ultimately, you should be careful about taking out a shareholder loan. There are circumstances in which it may be appropriate to borrow money from your company. For example, if:
- Your company has excess funds available to loan
- You will be able to and intend to repay the loan
- The loan is not too extravagant (for example, it does not represent a large proportion of your company’s assets)
However, there are also circumstances in which taking out a shareholder loan can lead to issues, particularly for your company. Generally, you should avoid borrowing money from your company as a shareholder if and/or when:
- You intend to use the money for personal bills or lifestyle expenses
- Your company only has a limited amount of funds available
- You will be unable to repay the loan
- You intend the funds to supplement insufficient dividends or wages
Before borrowing, ask yourself:
- Can you repay or formalise the amount before the company’s lodgment day?
- Can you meet the minimum yearly repayments over the full loan term?
- Have you checked the benchmark interest rate for the current income year?
- Are the loans and repayments recorded correctly in the company accounts?
- Would dividends (or, if you are also a director or employee, director’s fees or salary) be a more appropriate way to receive money from the company?
Conclusion
As a shareholder, while it can be beneficial and simple to borrow money from your company, there are various things you should consider before proceeding. Otherwise, it can lead to unfortunate consequences, especially for your company. You can find more information from the Australian Taxation Office (ATO) here.
As many of these concepts can be confusing, consult a tax accountant today for further assistance and advice.
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