Every Australian company director eventually moves money between themselves and the business. You pay a supplier on your personal credit card because the company account is low. You tip your own funds in to cover wages. You take a few thousand out when cash flow is tight and intend to square it up later. None of that fits neatly into salary or dividends, so the company needs somewhere to record it.
That somewhere is the directors loan account (DLA). It is not a bank account. It is an accounting record, a running ledger in the company's books that tracks money moving between the company and a director, and it shows at any moment which side owes the other. Used properly, a DLA is a practical tool for reimbursements, temporary funding and short-term cash flow. Used sloppily, it becomes a tax and governance problem, because for private companies the ATO has a specific regime, Division 7A of the Income Tax Assessment Act 1936 (Cth), that can recharacterise an unpaid loan balance as a dividend. This guide explains how the ledger actually works, the triggers and deadlines that matter, the traps that catch directors, and where an accountant and a lawyer each earn their keep.
The players: the company, the director and the ATO
A directors loan account sits at the point where three sets of interests meet.
- The company: money in its bank accounts belongs to the company, not the director. Every payment out or repayment in is a movement that the DLA should record.
- The director: the person borrowing from or lending to the company, and the person with statutory duties to the company that do not disappear because the money is "theirs" informally.
- The ATO: the regulator that polices the boundary between a genuine loan and what is really a dividend, through Division 7A.
- The accountant or bookkeeper: the person who keeps the ledger accurate, calculates what must be repaid each year, and tracks the deadlines.
Where there are two or more directors, the company keeps a separate loan account for each person, and each balance is assessed on its own.
How the ledger works: credits, debits and the running balance
The mechanics are simple. When the company owes the director, the DLA shows a credit balance: you paid a business expense personally, or you transferred funds in to keep the business moving. When the director owes the company, it shows a debit balance: you withdrew company money for personal use, or the company paid a personal expense on your behalf.
Over a year these movements offset each other. You might inject funds in March, take money out in June, and have your bookkeeper net the entries so the DLA shows a single balance at any point. That is fine as long as the ledger is accurate, reconciled regularly and backed by records. The problems start when the DLA is treated as a casual running tab that nobody reconciles until tax time.
The other distinction that matters is between a loan, a salary and a dividend. A company generally does not have "drawings" in the way a sole trader does. Money taken out of a company is one of three things:
- Salary or wages: employment income, processed through payroll with PAYG withholding and superannuation.
- Dividend: a distribution of profit, declared with proper records and resolutions, and only where the company can satisfy solvency requirements.
- Loan: money borrowed through the DLA, with the expectation of repayment.
Booking genuine wages to the DLA instead of payroll does not make them a loan, it just creates two problems at once: PAYG and super obligations that have not been met, and a loan balance that did not really exist. Deciding what the payment is, before the money moves, is the single most useful habit a director can adopt.
When the ATO calls the balance a dividend: Division 7A
Division 7A is the regime that makes directors loan accounts a legal topic rather than just an accounting one. It applies to private companies, and it is designed to stop owners using loans to extract company profits without paying tax on them as dividends.
A deemed dividend under Division 7A is an unfranked dividend. It is included in the recipient's assessable income and taxed at their marginal rate, with no franking credits attached, which for most directors means a much larger tax bill than the loan was worth in cash. The amount is also capped by the company's distributable surplus under s 109Y, so a company without profits may not be taken to have paid a dividend at all.
Three triggers: payments, loans and forgiven debts
Division 7A catches three separate ways of moving value out of a private company to a shareholder, or to an associate of a shareholder (which includes spouses, children, family trusts and companies controlled by them).
- Payments: s 109C treats an amount paid to a shareholder or associate as a dividend.
- Loans: s 109D treats a loan as a dividend in the year it is made if it is not fully repaid before the lodgment day for that year.
- Forgiven debts: s 109F treats the forgiveness of a debt owed by a shareholder or associate as a dividend.
The loan trigger is the one that bites directors loan accounts, because an ordinary unpaid DLA balance at year end is exactly what it describes.
The lodgment day deadline
Everything in Division 7A runs off the lodgment day for the company's year of income. In broad terms, that is the day the company's income tax return for the year is required to be lodged, or the day it is actually lodged if that happens earlier. A loan that is fully repaid before the lodgment day drops out of Division 7A altogether. A loan that is still outstanding on that day is a deemed dividend unless it qualifies for one of the exceptions.
The practical consequence is that the DLA cannot be left to sort itself out at the accountant's convenience. The date the return goes in fixes the date the loan balance is tested, so the repayment, or the paperwork, has to be in place before then.
The complying loan: the written agreement safe harbour
A loan that is not repaid before the lodgment day is not a dividend if it meets the requirements of s 109N. Before the lodgment day for the year the loan is made, all three of these must be in place:
- A written loan agreement: setting out the terms of the loan.
- Interest at or above the benchmark rate: for the year, payable for years after the year the loan is made.
- A term within the maximum: 7 years for an ordinary loan, or 25 years where the loan is fully secured by a registered mortgage over real property and the property is worth at least 110% of the loan.
The written agreement has to exist before the lodgment day. A loan that was never documented cannot be retro-fitted into compliance for that year, which is why directors who run DLAs informally for years discover the problem only when they try to fix it.
Amalgamated loans and the minimum yearly repayment
For loans made under the current rules, the mechanics continue after the first year. Loans to the same entity are pooled into a single amalgamated loan, and under s 109P they are not treated as dividends in the year they are made if they meet the s 109N requirements. Instead, from the following year the entity must make a minimum yearly repayment calculated under s 109E, worked out so the loan is fully amortised over its remaining term at the benchmark rate.
If the payments made in a year fall short of the minimum yearly repayment, the shortfall is itself treated as a dividend. The Commissioner can waive that outcome in genuine hardship cases under s 109Q, but that is a discretionary safety valve, not a planning option.
The benchmark rate is set by reference to the Reserve Bank's Indicator Lending Rates for standard variable housing loans, published before the start of the income year. The ATO publishes the rate each year: it was 8.37% for the income year ended 30 June 2026, and 8.77% for the year ended 30 June 2027. Because the rate moves, minimum repayments and the interest rate required on a complying loan both need to be checked each year rather than set once and forgotten.
Where it bites: the traps that catch directors
Wages booked to the loan account
Payments to a shareholder in their capacity as an employee sit outside Division 7A under s 109ZB(3), precisely because they are supposed to be wages with PAYG withholding and superannuation attached. If a working director's living costs are paid through the DLA instead, the payment is neither a clean loan nor compliant wages. The director gets the worst of both outcomes: a DLA balance that looks like a loan, and unpaid PAYG and super obligations underneath it.
Repayments that do not count
Not every payment into the company counts as a repayment of the loan. Round-robin arrangements, where the company lends money to the director so the director can repay an earlier loan, are specifically caught: s 109R provides that certain payments relating to a loan are not taken into account for working out whether it has been repaid. The ATO looks at the substance of the money flow, not the labels on the entries.
Loans to associates and family
Division 7A does not stop at the director. A loan to a spouse, a child, or a family trust or company controlled by the director is a loan to an associate of a shareholder and is caught the same way. Shifting the loan around the family structure does not move it outside the regime; it usually just creates additional deemed dividends in additional hands.
Trust structures and unpaid present entitlements
Where a company is a beneficiary of a family trust, an unpaid present entitlement owed by the trust to the company can interact with Division 7A. Under s 109XA, if a trustee makes a payment to a shareholder of a company that has an unpaid present entitlement, the payment can be treated as a distribution to the shareholder. Trust and company structures that rely on unpaid entitlements as a form of financing need specific advice, because the rules are technical and the ATO has been actively reviewing this area.
Insolvency and director duties
A DLA becomes sensitive the moment the company is under financial stress. Directors owe the company duties of good faith and care and diligence under the Corporations Act 2001 (Cth), and company money must be used for proper corporate purposes, not as a personal account. When the company is close to insolvency, the temptations cut both ways. Repaying the director's own loan ahead of other creditors can be attacked as an unfair preference, while taking further funds out when the company cannot pay its debts can expose the director to personal liability for insolvent trading. The answer is not to leave the DLA unresolved until a crisis: it is to get advice while the company is still healthy.
Where the accountant and the lawyer come in
A directors loan account is managed day to day by the bookkeeper, but the compliance decisions around it divide fairly cleanly between the accountant and the lawyer.
- The accountant or tax adviser owns the numbers: deciding before money moves whether a payment should be salary, a dividend or a loan, calculating the benchmark interest and the minimum yearly repayment, tracking the lodgment day, and disclosing the loan in the company's tax return.
- The lawyer owns the documents: drafting the written loan agreement with proper terms, interest, security and default provisions, and the surrounding governance documents such as the company constitution and any shareholders agreement that sets out how directors are paid and how money moves between the owners and the business.
The two roles meet on the complying loan. The accountant works out the benchmark rate and the repayment schedule; the lawyer makes sure the agreement is signed and dated before the lodgment day and actually says what the parties think it says. A loan agreement that is signed late, or that has no interest or repayment terms, is worth little more than nothing to the ATO. A lawyer is also the right person when the DLA needs to be cleaned up as part of a restructure, a shareholder dispute, or a sale, because a messy loan account is one of the first things a buyer's due diligence flags and prices into the offer.
The two dates that decide most DLA outcomes
Almost every directors loan account problem comes down to two dates. The first is the date the loan is documented: a written agreement in place before the money moves, or at the latest before the lodgment day, converts a potential dividend into a complying loan. The second is the lodgment day itself: a loan fully repaid before that date drops out of Division 7A entirely, while a shortfall in the minimum yearly repayment afterwards becomes a dividend in the year the shortfall occurs.
The expensive version of this story is the director who discovers, at year end, that a five-figure DLA balance is an unfranked dividend taxed at their marginal rate, with no complying agreement to save it and no time left to sign one. The cheap version is the director who documents the loan early, or simply repays it before the deadline, and never thinks about Division 7A again. If your DLA has been running informally, the first step is to ask your accountant what the balance is and when the lodgment day falls, and to have a lawyer review whether the existing loans are documented. The fix is usually far less expensive than the deemed dividend it prevents.