Director Loan Accounting

How director loan accounting usually works

A practical process starts with discovery and clean-up, then moves to controls and ongoing compliance:

• Discovery and reconstruction: pull bank feeds, prior-year ledgers and tax returns; identify personal expenses paid by the business and repayments back to the business.
• Ledger setup: create separate accounts for Director’s Loan – Receivable (amounts owed to the company) and Director’s Loan – Payable (amounts owed by the company), then reconcile.
• Division 7A assessment: where the lender is a private company, determine if amounts are loans, payments or debt forgiveness to shareholders/associates and whether Division 7A applies.
• Complying loan or fix: prepare a Division 7A loan agreement (unsecured up to 7 years; properly secured up to 25 years), or repay/offset before the lodgment day to avoid a deemed dividend.
• MYR and interest: calculate interest at the ATO benchmark rate and make the Minimum Yearly Repayment by 30 June each year; post journals and retain evidence.
• Documentation: board minutes, signed agreements, annual schedules, and reconciled software reports to support your file and your tax return.

Australian rules to keep in view

• Division 7A applies to private company loans, payments or debt forgiveness to shareholders or their associates. Without a complying loan or timely repayment, the amount can be an unfranked dividend.
• Loan terms: unsecured loans have a maximum 7-year term; loans secured by a real property mortgage (meeting ATO requirements) can be up to 25 years.
• Benchmark interest and MYR: the ATO publishes a benchmark interest rate each income year; calculate and pay the Minimum Yearly Repayment by 30 June.
• Trusts and UPEs: unpaid present entitlements to a private company beneficiary and inter-entity loans need careful treatment to avoid Division 7A issues.
• FBT vs Division 7A: loans to employees who are not shareholders may trigger FBT; where Division 7A applies, it generally takes precedence.
• Drawings vs wages/dividends: personal drawings are not deductible and must be cleared by a salary (with PAYG/SG), a dividend, a repayment, or a complying loan.

If you are unsure how these apply to your structure, speak with a Tax Accountant or browse the Help Centre.

What to compare before you commit

Accounting entries: common scenarios

• Company pays a personal expense for a director/shareholder: Dr Director’s Loan – Receivable; Cr Bank/Payables.
• Director repays the company: Dr Bank; Cr Director’s Loan – Receivable.
• Clearing drawings with a salary/bonus: Dr Wages/Salary; Cr Director’s Loan – Receivable (with PAYG/SG processed via payroll).
• Clearing with a dividend: Dr Retained Earnings/Dividends Paid; Cr Director’s Loan – Receivable (consider franking and timing).
• Interest and MYR on a complying Division 7A loan: post interest accruals and receipt of MYR by 30 June each year.

Set up separate contacts/accounts for each director, and attach evidence to each transaction in your software for auditability.

Year-end checklist and deadlines

• Reconcile director loan ledgers to bank statements and prior-year closing balances.
• Assess Division 7A exposure for all relevant transactions in the income year.
• Put a complying Division 7A loan agreement in place or repay before the company’s lodgment day for that year.
• Calculate benchmark interest and pay the Minimum Yearly Repayment by 30 June each year.
• Document minutes/resolutions, loan schedules, interest calculations and evidence of repayments or set-offs.

Software tips (Xero, MYOB, QuickBooks)

• Create distinct Balance Sheet accounts for each director’s loan (receivable and payable) to avoid netting off different relationships.
• Use bank rules and tracking to tag repayments and drawings consistently; attach receipts where the company paid a personal expense.
• Maintain an annual loan schedule outside the file (spreadsheet) that ties to the ledger and includes opening balance, interest, MYR and closing balance.
• Lock periods after year-end adjustments to prevent inadvertent changes to the loan ledger.

Who does what

• Bookkeeper: day-to-day coding, reconciliations, attachment of evidence, maintaining the loan ledger.
• BAS Agent: BAS/GST implications where relevant and review of coding impacts.
• Tax Accountant: Division 7A assessment, loan agreements, MYR/interest calculations, dividends vs salary strategy, and company tax return integration.
• Payroll Services: processing salary/bonus to clear drawings with PAYG/SG done correctly.

Best next steps

Write down the opening balance of each director loan, list all personal payments by the business, and note any repayments or dividends. Then decide whether you will repay, salary/bonus, or put a complying Division 7A loan in place this year.

If your deadline is close or the history is messy, get a specialist to reconstruct the ledger and model options before lodgment.