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Borrowing money from your own company? Check Division 7A first
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Overview
Borrowing from the family company can create a personal tax bill. Check when the loan must be repaid or put on complying terms. Then budget for any yearly repayments.
The first deadline belongs to the company
Your family needs $40,000 for a renovation. The trading company has the cash, so you transfer it to your offset account and call it a loan. Before treating that as an interest-free advance, check Division 7A. The rules can treat certain private company loans to shareholders or their associates as unfranked dividends, generally limited by the company’s distributable surplus.
Start with the date of the advance, who received it and why. For a straightforward shareholder loan, common options include genuinely repaying it in full or putting it under a complying written loan agreement before the company’s lodgment day. That day is generally the earlier of the return’s due date and the date the company actually lodges. An early lodgement can bring the deadline forward.
A complying agreement has rules about its term and interest. Your adviser can check the applicable benchmark rate, the permitted term and any security. Simply labelling a transfer “director loan” in the accounts doesn’t establish those terms.
The next deadline belongs on your household calendar
On a complying loan, the first minimum yearly repayment is generally due by the end of the income year after the loan was made. For a company with a 30 June year end, that means budgeting for a 30 June payment. A shortfall can itself have tax consequences. Repayments funded by immediately borrowing again from the company may be disregarded.
