Olivia is the Head of Legal at Lawpath, where she helps Australian businesses navigate complex legal challenges with practical, commercially minded advice. She specialises in employment matters, contract drafting, pre-litigation strategy, dispute resolution, commercial law and startup compliance, and has supported clients across technology, healthcare, professional services and retail. Olivia is passionate about making legal services accessible, personable and effective for every client.
A director loan is money your company lends to you, the director, that you have to pay back. It is legal in Australia, and if you set it up the right way you will not pay tax on it. Get it wrong, and the Australian Taxation Office (ATO) can treat the whole amount as a taxable dividend in your own name.
Here is the part most founders trip on. The money is sitting right there in the company account, it feels like your money, and taking some out seems harmless. Your company is a separate taxpayer, though, and the tax rules that govern a director loan were written precisely to stop owners quietly pulling profit out tax-free. This is the bit of running a company people put off until their accountant raises an eyebrow at year end.
- A director loan is legal, but Division 7A decides the tax. Borrow from your own company and the loan is fine under company law, as long as you follow the Division 7A rules on documenting and repaying it.
- You have two deadlines, not one. Repay the money or sign a complying loan agreement before the company’s lodgment day, then make a minimum repayment every year after that.
- The 2026-27 benchmark interest rate is 8.77%. A complying loan has to charge at least this rate, up from 8.37% the year before.
- Miss a step and the ATO deems a dividend. An unpaid, undocumented director loan becomes an unfranked dividend in your personal return, taxed at your marginal rate with no franking credit to soften it.
- Sometimes a wage or a dividend is the smarter call. If you are drawing money to live on rather than to repay, paying yourself properly usually beats a loan.
Is it legal for a director to borrow money from their company?
Yes. A director can borrow money from their company, and plenty do. Company law does not ban it. What it does do is hold you to your duties as a director while you do it.
You have to act in the company’s best interests, avoid trading while insolvent, and not strip cash the business needs to pay its bills. A loan that leaves suppliers or the ATO unpaid is where “legal” turns into a director-duty problem fast.
Check your paperwork before the money moves. Your company constitution or shareholders agreement may require board approval, shareholder approval, or both, depending on the amount and who is borrowing. For a sole director who owns every share, the approval is a formality you still record in writing. For a company with other shareholders, skipping their sign-off is how a routine loan becomes a dispute.
How is a director loan different from paying yourself?
A director loan is borrowed money you repay. A wage or a dividend is money you keep. That difference drives everything that follows, and mixing the two up is the single most common reason a director loan goes sideways.
Treat a loan like income and you skip the tax that income attracts. Treat income like a loan and you create a debt you never meant to owe. Most founders have three real ways to get money out of a company, and each is taxed differently.
| Method | How it is taxed | PAYG and super | Best when |
|---|---|---|---|
| Director loan | No tax if it complies with Division 7A. You pay interest back to the company. If it fails the rules, the balance is a deemed dividend. | Neither applies | Short-term, you can repay it, and the company has spare cash |
| Salary or director’s fees | Taxed at your marginal rate. The company claims a deduction. | Both apply | You want steady, predictable income to live on |
| Dividends | Paid from already-taxed profit. Franking credits attach, so you are taxed at your marginal rate less the credit. | Neither applies | The company is profitable and you hold shares |
If you are weighing up the options for the long run, our guide on how to pay yourself as a company director walks through salary, dividends and fees in detail. A loan is a tool for timing, not a substitute for actually paying yourself.
When does Division 7A apply to a director loan?
Division 7A applies the moment a private company lends money to a shareholder or their associate. That catches most director loans, because a director who owns shares is a shareholder, and a director who owns none is usually an associate of someone who does. The rules live in Division 7A of the Income Tax Assessment Act 1936 (Cth).
The word “loan” is drawn widely on purpose. It is not just a formal advance with paperwork. Under Division 7A, a loan includes:
- An advance of money
- Credit or any other form of financial accommodation
- A payment the company makes for you, on your behalf, if you have to pay it back
- Any transaction that is, in substance, a loan of money
That last point catches people out. Pay a personal bill from the company card, let a shareholder “running account” build up over the year, or draw cash with no label on it, and you may have made a Division 7A loan without ever calling it one. The ATO looks at substance, not what you wrote in the ledger.
How do you make a director loan comply with Division 7A?
To avoid tax, your director loan has to look like a real loan on real terms. Put it in writing, charge proper interest, and keep it inside the maximum term. Four conditions have to be met:
- The loan is set out in a written agreement, signed by both the company and you
- Interest is charged at or above the Division 7A benchmark rate for the year
- The term runs no longer than 7 years for an unsecured loan
- Or up to 25 years, if the loan is secured by a registered mortgage over real property worth at least 110% of the loan when the agreement starts
You do not need a lawyer to draft something from scratch. A Division 7A loan agreement template covers the parties, the amount, the interest rate, the term and the repayment schedule in one document, which is exactly what the ATO wants to see. If you want the background first, our Division 7A loan agreement explainer breaks down each clause.
Deadline one: your company’s lodgment day
For the year the company advances the money, you have to either repay it in full or get a complying agreement signed, and both must happen before the company’s lodgment day. Signing the agreement a day late does not fix it. The loan is already a deemed dividend by then.
Lodgment day is the earlier of the day the company actually lodges its tax return and the day that return is due. It is not 30 June, and it is not a fixed date. Lodge early and you pull your own deadline forward, which surprises directors who assume they have until the following year.
Deadline two: the minimum yearly repayment
Your complying loan is not “set and forget”. From the income year after you take the money, you owe a minimum yearly repayment of principal and interest by 30 June each year, until the loan is gone. The amount depends on the balance, the years left on the term, and that year’s benchmark rate.
Here is what that looks like in practice. Say you put a $30,000 director loan on complying terms over 7 years. In the first full year, at the 8.77% benchmark rate, your minimum repayment lands at roughly $5,900. Miss it, and only the shortfall is treated as a dividend, not the whole loan, which is a small mercy worth knowing. Rather than work the figure out by hand, run it through the ATO’s Division 7A calculator and decision tool.
What is the Division 7A benchmark interest rate for 2026-27?
The Division 7A benchmark interest rate for the 2026-27 income year is 8.77%, up from 8.37% in 2025-26. A complying director loan has to charge at least this rate, and it applies to every existing complying loan for the year, not only new ones. The ATO publishes the rate each year, so check it every June.
| Income year | Division 7A benchmark rate |
|---|---|
| 2025–26 | 8.37% |
| 2026–27 | 8.77% |
One neat trick from the accounting side: write your loan agreement to reference “the Division 7A benchmark rate for the year” rather than a fixed 8.77%. That way the document stays correct when the rate moves, and you are not redrafting every July.
What happens if you get a director loan wrong?
Get it wrong and the unpaid amount becomes an unfranked deemed dividend in your personal tax return. Unfranked is the painful word. A normal dividend carries a franking credit for the tax the company already paid, so you are not taxed twice. A deemed Division 7A dividend carries no credit. You wear the full marginal rate on money you have usually already spent. For how the credit normally works, see our guide to franking credits.
Worth correcting a common belief here: the risk is a deemed dividend, not fringe benefits tax. People reach for “FBT” because it sounds like the penalty for a perk, but Division 7A loans are taxed as dividends in your own hands.
Picture a director who takes $30,000 out during 2026-27 and never signs an agreement or repays it before lodgment day. The ATO can treat the full $30,000 as assessable income that year. On a 37% marginal rate, that is about $11,100 in tax on cash that is already gone. One caveat softens the edges: the deemed dividend is capped at the company’s distributable surplus, so a company with little retained profit may see a smaller figure.
Common mistakes Lawpath’s accountants flag
Across the director loan questions our accounting team fields, the same handful of errors come up again and again. None of them are exotic. They are the quiet, easy-to-make slips that turn a legitimate loan into a tax bill.
- Documenting after lodgment day. The most frequent one. A director means to sort the paperwork, lodges the company return, then signs the agreement a week later. Too late. The ATO treats a backdated or late agreement as no agreement.
- Letting drawings pile up unlabelled. Small, regular withdrawals through the year feel like nothing. By June they are a five-figure shareholder loan account that nobody decided to create, and Division 7A still applies to it.
- Repaying then re-borrowing. Paying the loan down before 30 June to tick the box, then drawing it straight back out, is a pattern the ATO specifically watches. A repayment that is really a round trip does not count.
- Forgetting the yearly repayment. The first-year agreement gets signed, then the minimum repayment in year two or three slips. Each missed repayment is its own small deemed dividend.
- Using a loan to live on. If the money is really your wage in disguise, a loan just delays the tax and stacks up a debt. A pattern we see often is a founder borrowing year after year because the business never pays them a proper salary.
The fix for every one of these is the same: decide the money is a loan before you take it, document it before lodgment day, and diarise the 30 June repayment. A Division 7A register, even a simple spreadsheet listing each advance, repayment and interest charge, keeps you out of trouble at year end.
Should you take a director loan at all?
Sometimes a director loan is the right tool. It suits a short-term need where the company is sitting on surplus cash and you can genuinely repay. Bridging a personal gap for a few months, say, while a property settles. The key test is intent: you are borrowing, and you mean to pay it back.
A director loan is the wrong tool when:
- You want the money for ongoing personal bills or lifestyle spending
- The company’s cash is tight and the business needs it
- You cannot see how you will repay it within the term
- You are really topping up a wage that is too low
In those cases a dividend or a proper salary almost always beats a loan. You pay the tax, but you own the money cleanly, and you skip the annual repayment treadmill. If the answer is not obvious for your numbers, a quick chat on our accounting advice plan will settle it faster than guessing.
Frequently asked questions
Can a company loan money to a director?
Yes. A private company can lend money to a director. The loan is legal under company law, but Division 7A sets the tax conditions. Document it, charge the benchmark interest rate, and repay it on time, or the ATO treats it as a dividend to you.
Do you pay tax on a director loan?
Not if the loan complies with Division 7A. A written agreement, interest at the benchmark rate, and repayment within the term keep it tax-free in your hands. If it fails those tests, the unpaid balance is taxed as an unfranked dividend at your marginal rate.
Can a director loan be interest free?
Not if you want it to comply. A complying Division 7A loan has to charge interest at or above the benchmark rate, which is 8.77% for 2026-27. An interest-free loan to a director fails the test, so the balance risks being treated as a deemed dividend.
Does Division 7A apply if I own 100% of the company?
Yes. Owning every share does not exempt you. You are the shareholder Division 7A is built for. A sole director and shareholder still needs a complying loan agreement and still makes minimum yearly repayments, even though you are, in effect, signing with yourself.
When does the loan agreement need to be in place?
Before the company’s lodgment day for the year you took the money. That is the earlier of the day the return is lodged and the day it is due. Sign after that date and the agreement does not count, so the loan is already a deemed dividend.
What happens if you don’t repay a director loan?
Without a complying agreement, the unpaid loan becomes an unfranked dividend in your tax return, taxed at your marginal rate with no franking credit. With an agreement, missing a yearly repayment turns only the shortfall into a deemed dividend, not the full balance.
What is the difference between a director loan and drawings?
Drawings is a bookkeeping label for money an owner takes out. In a company, there is no tax-free “drawings” like a sole trader has. If a director takes money that is not salary or a dividend, it is usually a loan, and Division 7A applies whatever your accounting software calls it.
How long can a director loan last?
Up to 7 years for an unsecured loan. The term stretches to 25 years only where the loan is secured by a registered mortgage over real property worth at least 110% of the loan at the start. Most director loans are unsecured, so 7 years is the usual ceiling.
Can I use a director loan for personal expenses?
You can, but think twice. A one-off for a short-term need is fine if you document it and repay it. Funding your regular living costs through loans stacks up a growing debt and signals you should be paid a salary or dividend instead.
None of this means you are behind or have done something wrong. Taking money out of your own company is one of the most normal questions a director has, and the rules only bite when nobody sets the loan up properly. You have time to fix it, and the setup is a single document plus two dates in your calendar.
Sort it before your next lodgment day. Set up your Division 7A loan agreement today and keep your director loan on the right side of the ATO.
