Directors borrowing money from their company in Australia is one of the more misunderstood areas of corporate law. It's not automatically illegal, but the rules are strict, the paperwork matters, and the Australian Taxation Office watches this area closely. Get it wrong and a simple loan can be recharacterised as a dividend, a salary, or even a deemed unfranked distribution, each carrying a different tax sting.
What the Corporations Act 2001 actually says
The Corporations Act 2001 does not ban directors from borrowing from their companies. What it does is impose a duty of care and good faith. Section 181 requires directors to act in the best interests of the corporation. Section 182 prohibits improper use of position to gain a personal advantage. Together, those two provisions mean a director who borrows on sweetheart terms, skips repayments, or never documents the loan at all, risks a serious breach of duty finding.
For public companies, the rules go further. Section 209 of the Corporations Act 2001 prohibits a public company from making a loan to a director of the company or a related company unless shareholder approval is obtained first. Private (proprietary) companies have more flexibility, but that flexibility disappears fast when Division 7A of the Income Tax Assessment Act 1936 enters the picture.
Division 7A: the rule that catches most directors out
Division 7A is the provision that trips up the most directors borrowing money from their company in Australia. It applies to private companies and treats certain payments, loans, or forgiven debts to shareholders or their associates as unfranked dividends. In practice, that means the director pays income tax on the amount received, at their marginal rate, with no franking credit to offset it.
A loan escapes Division 7A treatment only if it meets all three of the following conditions:
- The loan is put in writing before the lodgement date of the company's income tax return for the year in which the loan was made.
- The interest rate is at least equal to the ATO's benchmark interest rate for that year.
- Minimum annual repayments are made on schedule each year.
Miss any one of those three, and the ATO treats the entire outstanding balance as a deemed dividend in the year the breach occurs. The ATO's Division 7A guidance sets out current benchmark rates and repayment calculators, and it updates them annually.
Loan terms that keep you compliant
The maximum loan term under Division 7A depends on whether security is provided. An unsecured loan must be fully repaid within 7 years. A loan secured by a registered mortgage over real property can run for up to 25 years. Both carry a minimum interest rate set by the ATO each income year, published well before 30 June. For 2025–2026, the benchmark rate was 8.27 per cent per annum, so directors borrowing money from their company in Australia need to apply that rate at minimum.
Minimum repayments are calculated on the opening balance at the start of each income year, not the original loan amount. That distinction matters when balances grow because additional draws are made mid-year.
Director duties beyond the tax rules
Tax compliance and corporate law compliance are not the same thing. Even a loan that satisfies Division 7A can still breach a director's duties if the company can't afford to make it. Directors borrowing money from their company in Australia must satisfy themselves that the company remains solvent after the loan is advanced. Drawing funds when the company is insolvent, or when the loan makes it insolvent, risks a personal insolvent trading liability under section 588G of the Corporations Act 2001.
Board minutes should record the decision to make the loan, confirm the solvency assessment, and note that the loan was made on arm's-length terms. That paper trail protects directors if ASIC or the ATO later scrutinises the transaction.
If you're still in the process of structuring your business, it's worth reading about the 10 steps to start a business in Australia to understand how company structure choices affect your exposure to rules like Division 7A from day one.
What happens if the loan isn't repaid
A loan forgiven by the company is also caught by Division 7A. The forgiven amount is treated as a deemed dividend in the year of forgiveness. That means a director who borrows $80,000, repays $20,000, and then has the remaining $60,000 written off will receive a $60,000 deemed unfranked dividend in the year of forgiveness and pay income tax at their full marginal rate on that amount.
The same logic applies to a loan that simply goes unpaid. If minimum repayments aren't made in a given income year, the ATO treats the shortfall as a deemed dividend. Catching up on repayments in a later year doesn't unwind the deemed dividend that already arose.
Documenting the loan correctly
Documentation is not optional. It's the legal skeleton the entire arrangement rests on. A compliant Division 7A loan agreement needs to include the loan amount, the interest rate, the repayment schedule, the term, and details of any security provided. It must be signed before the company lodges its tax return for the year the loan was made. A generic "I owe the company X" memo won't do.
Many directors make this harder for themselves by treating the company bank account informally, moving money back and forth without records. Good accounting habits prevent these problems early. For practical guidance on keeping your records clean, the tips in this article on small business accounting for Australian business owners are a useful starting point.
Alternatives worth considering
Before a director borrows from the company, it's worth asking whether a different structure achieves the same outcome with less risk. A formal salary or bonus is fully deductible to the company and taxed in the director's hands, but it carries no Division 7A risk and no repayment obligation. A franked dividend distributes profits to shareholders (including a director shareholder) with tax already paid at the company rate attached as a credit, reducing the director's personal tax bill.
Neither alternative is automatically better. The right choice depends on the company's profit position, the director's marginal tax rate, and whether the company has franking credits available. A tax adviser can model all three scenarios before any money moves.
When to get professional advice
The legality of directors borrowing money from their company in Australia sits at the intersection of corporate law, income tax law, and director duties. An accountant handles the Division 7A mechanics. A solicitor handles the loan agreement and the Corporations Act obligations. Neither fully substitutes for the other. For transactions above $50,000, engaging both is the safer approach.
Directors who discover a past loan was never documented properly, or that repayments weren't made in a prior year, should seek advice immediately. The ATO has published a practice statement confirming that self-correction is possible in some circumstances before the ATO raises an assessment, but the window for that correction is narrow.
A well-structured loan from your company to yourself is a legitimate financial tool. An undocumented, interest-free, never-repaid draw on the company account is a tax liability waiting to be assessed.