Directors Loan Agreement (Australia)

A Directors Loan Agreement in Australia is a legally binding written instrument.

Loans from a company to a director are primarily regulated by Division 7A of the Income Tax Assessment Act 1936 (Cth), which is administered by the Australian Taxation Office (ATO). Division 7A was introduced to prevent private companies from distributing profits to shareholders (or their associates, including related directors) in the form of tax-free loans or payments, instead of taxable dividends. Under Division 7A, a loan from a private company to a director (who is a shareholder or associate of a shareholder) will be treated as an unfranked deemed dividend — and taxed at the director's marginal tax rate — in the income year the loan is made, unless the loan meets all the requirements of a 'complying loan agreement' (also called a 'section 109N loan agreement').

For a loan from a company to a director to be a complying loan agreement and avoid Division 7A treatment as a deemed dividend, the ATO requires that: the loan must be made under a written agreement before the company lodges its tax return for the income year in which the loan was made; the loan must be repaid within 7 years (for unsecured loans) or 25 years (for loans secured by a registered mortgage over real property); and the agreement must require the borrower to pay interest on the outstanding balance at least at the ATO's benchmark interest rate for each income year.

Loans from a director to their company (director loans to the company) are more straightforward from a Division 7A perspective — they create a creditor-debtor relationship without the deemed dividend risk — but still require proper documentation to protect the director's interests as a creditor, particularly in the event of the company's insolvency.

The Australia Directors Loan Agreement (Australia) template provides a thorough Directors Loan Agreement suitable for both directions of lending (company to director, or director to company), with the key Division 7A compliance provisions built in.

The legal framework governing the Directors Loan Agreement (Australia) in Australia draws on several key statutes and regulatory bodies. Under the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission (ASIC) regulates companies and financial services. Section 127 of the Corporations Act 2001 governs company execution of documents. The Australian Competition and Consumer Commission (ACCC) enforces the Competition and Consumer Act 2010 (Cth). The Australian Taxation Office (ATO) administers the Goods and Services Tax under the A New Tax System (Goods and Services Tax) Act 1999. The Federal Court of Australia and Supreme Courts of each state have jurisdiction over corporate disputes. Parties executing a Directors Loan Agreement (Australia) in Australia should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Corporations Act 2001 (Cth) sets the foundational requirements.

A Directors Loan Agreement is required or strongly recommended in the following circumstances.

Company loans to directors (Division 7A compliance): Any time a private company lends money to a director (or a director's associate, including their spouse, children, or related entities), a complying written loan agreement must be in place before the company lodges its income tax return for the income year in which the loan was made. Without this agreement, the entire loan amount may be treated as an unfranked deemed dividend, with potentially significant income tax consequences for the director.

Director loans to the company: When a director advances their own money to help the company meet its financial obligations — such as covering a cash flow shortage, paying wages, or funding a capital expenditure — a written loan agreement documents the director's rights as a creditor and the company's obligation to repay. This is critical if the company subsequently becomes insolvent, as the director needs to be able to prove their creditor claim.

Director's loan account overdrawn: When a director's loan account with the company goes into debit (i.e., the director has drawn more from the company than they have put in), the overdrawn balance may be subject to Division 7A from the end of the income year. A complying loan agreement should be put in place promptly.

Company restructuring: When a company is restructured — for example, when a trust distributes unpaid present entitlements to a company, or when a related-party loan is assigned between group entities — Division 7A and directors' loan issues need to be carefully managed, and written loan agreements are essential.

Tax planning and compliance: An accountant or tax adviser who identifies a director loan account issue in the course of preparing tax returns will typically advise the client to put a complying written loan agreement in place to regularise the position.

A compliant Australian Directors Loan Agreement should include the following key elements.

Parties: The full legal name and ACN of the company, and the full name and address of the director (or the director's associate) who is borrowing or lending.

Loan amount: The principal amount of the loan. For an existing loan account that has built up over time, the starting balance should be stated.

Interest rate: For a loan from the company to the director, the interest rate must be at least the ATO's benchmark interest rate for each income year (currently 8.77% for 2024-25) to comply with Division 7A. The agreement should specify whether interest is calculated daily, monthly, or annually, and whether it is capitalised or payable periodically.

Repayment terms: For an unsecured loan from the company to the director, the maximum term under Division 7A is 7 years. For a loan secured by a registered mortgage over real property, the maximum term is 25 years. The agreement must specify a repayment schedule consistent with these limits.

Security: Whether the loan is secured (e.g., by a mortgage, charge, or personal guarantee) or unsecured.

Minimum annual repayment: Under Division 7A, the borrower must make a minimum annual repayment each year (as calculated under the Division 7A formula), or the shortfall will be treated as a deemed dividend. The agreement should reference this obligation.

Default provisions: What happens if the borrower fails to make minimum repayments or interest payments — including the company's right to demand repayment of the entire outstanding balance.

ATO compliance: An express acknowledgment that the agreement is intended to comply with Division 7A of the Income Tax Assessment Act 1936 (Cth).

Additional compliance elements for a Directors Loan Agreement (Australia) used in Australia include: Under the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission (ASIC) regulates companies and financial services. Section 127 of the Corporations Act 2001 governs company execution of documents. The Australian Competition and Consumer Commission (ACCC) enforces the Competition and Consumer Act 2010 (Cth). The Australian Taxation Office (ATO) administers the Goods and Services Tax under the A New Tax System (Goods and Services Tax) Act 1999. The Federal Court of Australia and Supreme Courts of each state have jurisdiction over corporate disputes. Forms-legal.com provides this template as a starting point for Australia-compliant documentation.