One of the most common quiet problems in small companies
The company paid for a personal expense once. Then again. Then a director covered a business cost personally, and it was never quite squared away.
Individually, each of these feels minor. Together, over time, they form a director's loan account — and an unmanaged one is one of the most common quiet problems in small companies.
The short answer
A director's loan account tracks money owed between a company and a director — in either direction. It builds up whenever money moves between the two outside of normal salary, declared dividends, or a genuine reimbursement. It's not inherently a problem, but an unreconciled, growing balance — particularly one where the director owes the company — can trigger real tax consequences under Division 7A.
What typically creates a director's loan account balance
Company money used for a director's personal spending, without being processed as salary or a dividend.
A director paying a genuine business expense personally, and the company not yet reimbursing them.
A dividend declared but not yet physically paid out in cash.
Informal, undocumented transfers between the company and director accounts, made without a clear purpose recorded at the time.
Which direction the balance runs matters
| Balance type | What it means | Why it matters |
|---|---|---|
| Debit balance | The director owes the company | This is the balance Division 7A specifically targets — if not properly managed, it risks being treated as a taxable deemed dividend |
| Credit balance | The company owes the director | Generally less tax-risky, but still needs to be properly documented and reconciled, particularly for consistency and clarity |
Why a debit balance is the one to watch
When the net effect of transactions across the year leaves the director owing the company money, this is exactly the situation Division 7A of the tax law was designed to address — preventing directors from effectively accessing company profits tax-free by calling them a “loan” that's never genuinely repaid. Left unmanaged, this balance can be treated as an unfranked dividend, creating a real, often unwelcome, tax bill.
The core discipline that prevents this becoming a problem
Use the loan account only for genuine loans. Not as a general-purpose bucket for anything that doesn't obviously fit salary or dividends — each transaction should have a clear, identified purpose.
Reconcile it regularly, not just at year-end. A monthly or quarterly review, alongside your other financial reporting, keeps the balance visible and manageable rather than a year-end surprise.
Keep supporting documentation. Approvals, records of what each transaction was for, and evidence of any repayments made.
Address a growing debit balance promptly. Either through genuine repayment, converting it into a properly documented Division 7A-compliant loan, or reclassifying it correctly as salary or a dividend — rather than letting it run indefinitely.
A simple example
Across a financial year, a director's various personal use of company funds nets out to $18,000 more than any repayments or reimbursements owed to them — an $18,000 debit balance on the director's loan account. If this remains unresolved by the time the company's tax return for that year is lodged, it can be treated as a deemed dividend — the trigger is the lodgment day for the relevant year's tax return, not simply 30 June. Addressed properly before that lodgment day — through a formal Division 7A loan agreement with minimum repayments, or genuine repayment — the tax consequence can be avoided or properly managed, subject to the detailed statutory rules and any applicable exceptions.
A quick self-check
Do I know, right now, whether my director's loan account is in debit or credit, and by how much?
Is every transaction in that account properly documented with a clear purpose?
Am I reviewing this balance regularly, or only when my accountant raises it at tax time?
If there's a growing debit balance, do I have a plan to address it before the company's tax return is lodged?
When should you get professional help?
you have a director's loan account balance you're not confident is properly managed;
you want to set up a genuine, compliant loan agreement to address an existing debit balance;
you're establishing a new company and want proper protocols in place from day one; or
you want a regular reconciliation process built into your reporting so this never becomes a year-end surprise.
Continue learning
→ Company Money vs My Money — Why Does the Difference Matter?
→ How Do I Pay Myself From My Business?
SKC Accounting | Knowledge Centre | Knowledge Guide 075
Last reviewed: August 2026
General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.