Taking Money From Your Company? Let's Talk About Director's Loans
If you're moving money from your company to yourself, this is for you (because obviously you want to access your money, right?! That's exactly the point of running your own business).
When you run a company and take money out of it that isn't salary, wages, super, or a declared dividend, it usually ends up as a director's loan.
The trick with a director's loan is making sure it's on Division 7A terms. That keeps the ATO happy and lets you actually treat it like a loan: minimum repayments, interest charged, fixed term.
Structured properly, it can give you a favourable tax outcome and is far better than the alternative. If it's not on Division 7A terms, the ATO will deem a dividend. No franking credits. Just straight taxable income, the whole thing. A tax issue you didn't see coming.
Let’s walk through it.
What Is a Director's Loan?
A director's loan is money taken from a private company by a director or shareholder that isn't classified as salary, dividends, super, or expense reimbursements.
In practice, that means a director's loan happens when money moves between you and your company and it isn't recorded as:
salary or wages
dividends
reimbursed expenses
superannuation
If it doesn't fall into one of those categories, it usually lands in your director loan account.
It's not free money, it's not a profit distribution, and it's not a salary. It's a loan you owe to the company. And loans come with rules.
What Is a Director Loan Account?
A director loan account is an accounting ledger that tracks money moving between a company and its directors or shareholders. You might also hear it called a shareholder loan or a director loan. Technically it's a "debit loan" (money you owe to the company).
Importantly, a director loan account is not a bank account. It's a ledger inside your bookkeeping system, likeXero or MYOB (but let's be real, use Xero, it's the best).
Think of it as a running balance that tracks money moving between you and your company.
If money goes back and forth and it isn't clearly recorded as salary, dividends, super, or expense reimbursements, it usually gets coded to the director loan account.
The director loan account shows one of two things:
you owe the company money, or
the company owes you money
It's simply a record of who owes who.
How Does Money End Up in the Director Loan Account?
Money doesn't automatically "fall" into the director loan account. It ends up there based on how transactions are coded in your bookkeeping.
Here's what that looks like in real life.
You transfer money to yourself
You move $25,000 from the company bank account to your personal account.
If it's not processed as wages, a declared dividend, or a reimbursement, it usually gets coded to the director loan account.
That means the books now show you owe the company $25,000.
The business pays for your personal expenses
You use the business card to pay a $7,000 tax bill or your kids' school fees.
That transaction will likely be coded to the director loan account.
Now the books show that you owe the company $7,000.
Over time, these transactions build up.
Why Director Loan Accounts Grow
Most business owners are flat out. You're focused on growth, hiring, cash flow, clients, and strategy. You transfer money when you need it and assume it'll get sorted later.
Meanwhile, the director loan account grows in the background.
When no one is monitoring the balance during the year, that's when problems start.
What is Division 7A?
Division 7A is Australian tax legislation designed to stop private company profits being distributed tax-free to shareholders.
If your director's loan isn't repaid or properly structured by 30 June, the ATO can treat it as a deemed (unfranked) dividend.
That means:
it becomes taxable in your personal name
you may not receive franking credits
you could pay tax on money you no longer have available
Alternatively, you may need to put a formal Division 7A loan agreement in place, charge interest at the ATO benchmark rate in line with the agreement, and make compulsory minimum repayments each year over the term of the loan (7 years if unsecured, 25 years if secured).
None of this is dramatic. But it does need to be intentional.
Director's Loans Aren't "Bad" - But They Need to Be Structured & Planned For
A director's loan isn't automatically a problem. In growing businesses, they're common.
The issue isn't that the loan exists. The issue is when it's unmanaged.
Good structure usually includes a clear loan agreement (if the balance can't be repaid before the return due date or actual lodgement date, it may need to be converted into a complying Division 7A loan), minimum annual repayments based on the set loan terms, and correct interest calculations using the ATO benchmark rate set each financial year.
Often the long-term fix isn't just managing the loan itself though. It's reviewing how you're paying yourself in the first place — salary, dividend strategy, profit retention, proactive tax planning. When those are set properly, reliance on director's loans reduces significantly.
If Your Director Loan Account Is Growing
A growing director loan account balance is telling you something about how money is moving through your business. Worth understanding what.
It usually means one of three things:
you're drawing more than your current salary covers
profits aren't being distributed strategically
tax planning isn't happening early enough
All three point to a structural conversation. And structure is fixable.
The earlier you review the balance, the more options you have. More flexibility, more control, less pressure at 30 June.
Director's loans shouldn't be something you discover at tax time. They should be managed during the year, as part of your broader strategy.
Director's Loans and Growing Businesses
If you're running a company turning over $1M+ and scaling, director's loans become more important, not less.
At this level, cash flow decisions are larger, profit retention matters, personal tax planning matters, and the margin for error gets smaller.
"We'll sort it later" stops being a strategy. Intentional structure replaces it.
That's where good advisory support makes a real difference.
Director's Loan FAQs
What's the difference between a director's loan and a shareholder loan?
For most small private companies, they're the same thing. The director and shareholder are usually the same person, and the terminology shifts depending on which role is being referenced. The Division 7A rules and accounting treatment apply the same way regardless of which label you use.
What happens if I don't repay my director's loan by 30 June?
If the loan isn't repaid or put on a complying Division 7A loan agreement before the company's tax return is lodged (or by the lodgement due date, whichever comes first), the ATO can deem the balance an unfranked dividend. That means it's added to your personal assessable income with no franking credits attached.
What is the Division 7A interest rate?
The ATO sets a benchmark interest rate each financial year. Your loan agreement needs to charge at least that rate, and your minimum annual repayment is calculated using it. Because the rate updates every year, check the current figure on the ATO website before locking anything in.
How long can a Division 7A loan run for?
Seven years if the loan is unsecured. Twenty-five years if it's secured against real property and meets the specific conditions in the legislation.
Can my company owe me money instead of the other way around?
Yes. If you've put money into the company, or paid business expenses from your personal account, the director loan account can sit in credit, meaning the company owes you. That balance isn't subject to Division 7A, but it's still worth documenting and reviewing properly.
We're the Kind of Accountants You Can Ask
You built the business. You should be able to ask exactly how the money moves through it and get a straight answer.
Our role is to make sure the structure supports you, protects you, and gives you options, not surprises.
If you'd like clarity around your director loan account balance, Division 7A compliance, how to pay yourself properly from your company, or how to reduce reliance on director's loans altogether, we're the kind of accountants you can actually talk to.
We're Kindred Accounting. Accountants for business owners growing businesses in Australia.
