Marshall Q&A – Topic 2: Private Company Director Loans

Question: As a Director, Shareholder, or Owner, can I legally take a loan from my private company? 

Short Answer: Yes

Key Takeaways

  • Shareholder Loans are legal, and are regulated by the Income Tax Assessment Act 1936 (Cth);
  • Loans must meet minimum requirements to be ‘at arm’s length’; and
  • Loans or benefits which do not meet these requirements may be taxable.

Loans by a company to one of its directors or shareholders (both called ‘shareholder loans’) may initially appear to present an ethical minefield. With the right advice, there are clear actions you can take to ensure that all loans are above board.

Because these loans can extend to include a variety of benefits, it is important that all benefits are properly categorised. The Income Tax Assessment Act 1936 (Cth) (ITAA) describes which benefits are taxable and which are exempt, so this could save all parties come tax time.

Monetary benefits a company could pay a shareholder which may create tax liabilities include:

  • Money paid to a shareholder;
  • Money loaned to a shareholder; and
  • Shareholder debts forgiven by the company.

Keep in mind that non-monetary benefits, such as company cars, are usually seen as fringe benefits and subject to separate taxation. Where lent by the company for a specific occasion or duration, however, they can instead be viewed as ‘loans’, having important tax implications.

Money paid to a shareholder, and shareholder debts forgiven by the company essentially amount to the same thing. The ITAA classifies them both as ‘dividends’ and subject to taxation.

Some loans will also fit this definition. Loans which do not meet minimum requirements as to interest and duration are deemed to be dividends when not repaid by the end of that financial year, subjecting them to tax obligations.

In fact, the only way to avoid tax obligations on these monetary benefits is for the company and shareholder to enter into a loan agreement at arm’s length. This means that the terms of the agreement match those that would be given in the ordinary course of business to someone not associated with the company.

These terms must meet the ATO’s minimum requirements as to:

  • The duration of the loan (Maximum 25 years for mortgages and 7 years for other loans);
  • The minimum yearly repayments (According to the ATO’s published formula); and
  • The interest rate (As published yearly by the ATO, currently 4.52%).

Shareholder loans can create unintended consequences when used for the wrong purposes or poorly implemented, but valuable when used properly. Make sure that you are fully aware of the risks and ramifications and always seek legal advice before attempting to navigate these murky waters.