Borrowing money from your Company – Division 7A Loan Basics
- MCW Lawyers
- Apr 10
- 2 min read
It is common for directors or those responsible for managing the financial transactions of a private company in Australia to draw money from their company to meet personal expenses. However, doing this may trigger Division 7A Income Tax Assessment Act, resulting in unexpected tax, interest, or penalties if not managed correctly. Below outlines the basics of a Division 7A Loan and their implications.
What constitutes a Loan?
An advance of money;
Informal borrowings, private expenses paid from company accounts, or
A payment for a shareholder or their associate, if they have an obligation to repay the amount, whether it’s:
a. on account;
b. on their behalf; or
c. at their request.
Compliance of Loan under Division 7A
Loans provided under Division 7A must:
Be documented by the company as part of its tax return lodgement;
Impose interest (set annually by the ATO);
Be repaid within 7 years (unsecured) or 25 years (secured by registered mortgage).
For example:
Example: loan to a shareholder
Terry Pty Ltd loans $20,000 to Ann, a shareholder of Terry Pty Ltd. The money is loaned to Ann on the basis that she pays it back when she can. The $20,000 is a loan from Terry Pty Ltd to Ann because it is an advance of money, and Division 7A may apply 1
Before you borrow money from your company, you need to consider the potential income tax consequences. If you are concerned that you have borrowed money but have not documented the details, give our Business & Commercial Team a call on 02 9589 6666 or discuss with your accountant to ensure that you comply with the rules and any tax that is due is paid.
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