Director’s Loan Interest Rate in Australia

It’s common for small companies to move money between the business and its founders. You might lend funds to your company to cover cash flow, or your company may have lent money to you or another associate during a tight period.

Either way, the interest rate you set on a director’s loan matters. It affects tax, compliance and how your accounts are reported - and getting it wrong can be expensive.

In this guide, we unpack how director and shareholder loans work in Australia, how to choose a compliant interest rate, and the documents you’ll want in place to protect your company.

What Is A Director’s Loan (And Why Does The Interest Rate Matter)?

A director’s loan is simply money moving between a company and a director or shareholder outside normal wages, dividends or expense reimbursements. The loan can go either way:

• Director to company (you lend money to the business)
• Company to director/shareholder (the business lends money to you or an associate)

The interest rate matters because it signals whether the loan is on commercial terms and affects tax treatment. If the rate (and other terms) don’t meet certain requirements, the Australian Taxation Office (ATO) may treat a company-to-shareholder loan as an unfranked dividend under Division 7A (which can trigger extra tax). On the flip side, if you lend to the business, a clear, arm’s-length rate and written terms support deductibility and avoid disputes later.

If you’re new to the concept, it’s worth first getting across the basics of what a director loan is and how it works before you set the rate.

Which Interest Rate Applies To Director Loans In Australia?

Loans From A Company To A Director/Shareholder: Division 7A Rules

When a private company lends money to a shareholder or their associate (which can include directors), Division 7A of the Income Tax Assessment Act 1936 may apply. To avoid the loan being treated as a taxable, unfranked dividend, the loan generally needs to be a “complying loan” that meets all of the following:

• It’s documented in a written loan agreement by the company’s tax return due date.
• It uses at least the ATO’s benchmark interest rate for that year.
• It has a maximum term (typically 7 years if unsecured, or up to 25 years if secured over real property).
• Minimum yearly repayments (interest and principal) are made.

The ATO publishes the Division 7A benchmark interest rate annually. If your company has made loans or advances to shareholders or associates, you should cross-check that your rate is at least the benchmark and that the other Division 7A conditions are met. If not, part or all of the loan can be treated as a deemed dividend to the borrower, creating a surprise tax bill.

To meet the “written agreement” requirement properly, businesses often put a formal Loan Agreement in place (and if the loan is secured over assets or property, a Secured Loan Agreement).

Loans From A Director To A Company: Arm’s-Length, Commercial Terms

When you, as a director or shareholder, lend funds to your company, there’s no Division 7A benchmark you must use. Instead, the goal is to set a clear, commercial interest rate and terms that reflect an arm’s‑length deal (i.e. what two unrelated parties would agree to in similar circumstances).

Factors that influence a reasonable interest rate include:

• Risk profile and security: unsecured loans usually carry a higher rate than secured loans.
• Loan term: longer terms often justify a different rate to short-term working capital support.
• Market conditions: reference business lending rates for comparable risk and term.
• Purpose and cash flow: seasonal or high-variability cash flow may increase perceived risk.

Setting the rate at 0% or a token amount can raise issues. For example, it may muddle your company’s true financial position, cause confusion about whether the money is equity versus debt, and create tension among co-founders if expectations differ. A documented, commercial rate and a proper Loan Agreement keep everyone aligned and make it easier for your accountant to treat interest correctly for tax purposes.

How To Document The Interest Rate Properly (And Protect Your Position)

Once you’ve landed on the rate, it’s important to lock it in properly. Here’s a practical approach that small companies can follow.

1) Put A Written Loan Agreement In Place

For both company-to-director and director-to-company loans, a written agreement should set out the rate, repayment schedule, fees, security, and default rights. This is essential for Division 7A compliance and simply good risk management for related‑party loans.

• Loan Agreement: covers principal, interest, term, payments, default and enforcement.
• Secured Loan Agreement: adds collateral terms where you’re taking security over property or assets.

If your company is the lender and wants extra protection, you can also take a General Security Agreement over the borrower’s personal property and register it on the PPSR to secure your priority.

2) Register Security On The PPSR (If Taking Security)

If the loan is secured, register the security interest on the Personal Property Securities Register (PPSR) within the correct timeframes to protect your priority position. This helps if there’s ever an insolvency event or competing claims over the same assets.

Many businesses choose to register a security interest themselves or ask us to do it for them to ensure it’s done accurately. If you’re new to the register, this short explainer on why the PPSR matters for your business is a helpful primer.

3) Check Your Governance Documents

Before finalising a director-related loan, review your internal governance rules and founder arrangements. Your Company Constitution and any Shareholders Agreement may include rules for related‑party transactions, decision-making thresholds, or limits on borrowing that you’ll want to follow.

4) Minute The Decision

Record the board decision approving the loan arrangements (including the rate, term, and any security) and note any conflicts. Good minute‑keeping shows the directors considered their duties and the company’s interests when entering the loan.

Choosing A Commercial Interest Rate: Practical Tips

There’s no one-size-fits-all number for a director loan interest rate, but you can use this checklist to set a defensible, arm’s‑length rate.

• Compare to market: check what a bank or private lender would charge a business of similar size, risk and security.
• Adjust for security: lower rate if the loan is secured over valuable collateral; higher if unsecured.
• Match the term: short-term working capital loans might have different pricing to multi‑year funding.
• Consider cash flow: if revenue is volatile, build in a margin or flexibility in repayments.
• Keep it consistent: if multiple founders are lending, ensure similar terms to avoid disputes.
• Review annually: for longer loans, consider whether the rate remains appropriate in changing market conditions.

For company-to-shareholder loans, always check the ATO’s Division 7A benchmark when setting or reviewing the rate so you remain compliant and avoid deemed dividend issues.

Common Scenarios (And How Interest Works In Each)

Short-Term Director Cash Injection (Director → Company)

Use case: You cover a temporary cash flow gap (e.g. inventory purchase) and plan to be repaid within 6-12 months.

Interest rate: Often a straightforward commercial rate slightly above secured bank lending (because it’s usually unsecured). Keep the term short and repayments clear.

Documents: A concise Loan Agreement is usually sufficient. If the amount is significant, consider taking security and registering it on the PPSR.

Working Capital Facility Between Founders And The Company (Director → Company)

Use case: Founders each lend funds periodically with a cap and drawdown mechanism.

Interest rate: A variable or fixed rate pegged to a reference (e.g. RBA cash rate plus a margin) can keep it fair and flexible.

Documents: Detailed facility terms in a Loan Agreement and alignment with your Shareholders Agreement to avoid governance friction.

Company Loans To Shareholders Or Associates (Company → Director/Shareholder)

Use case: The business advances funds to a shareholder for personal reasons or to cover tax.

Interest rate: At least the annual Division 7A benchmark rate, plus all other Division 7A conditions (term, minimum yearly repayments, written agreement) must be satisfied to avoid deemed dividends.

Documents: A written loan agreement prepared by the company’s tax return deadline, accurate minimum yearly repayment calculations, and good record‑keeping.

Restructures Or Past Balances In A “Loan Account”

Use case: Historic drawings or expenses have built up as a director’s “loan account” on the balance sheet.

Interest rate: You may need to formalise the balance into a complying loan with an appropriate rate (Division 7A if the company is the lender). In some cases, a Deed of Forgiveness or restructure may be considered - always get tax and legal advice before proceeding, as there can be tax and duty consequences.

Compliance, Tax And Risk: Don’t Miss These Essentials

Division 7A Compliance Is Critical

If a private company lends to a shareholder or their associate and you don’t meet Division 7A requirements, the amount can be treated as an unfranked dividend. That can mean unexpected tax for the borrower and messy clean‑ups later. Ensure the loan is documented on time, use at least the benchmark interest rate, and make minimum yearly repayments.

Director Duties And Related-Party Scrutiny

Directors must act in the best interests of the company and avoid improper use of their position. Related‑party loans can attract scrutiny, so the board should consider whether the loan is fair to the company, properly authorised under the constitution, and recorded in minutes. If your company is part of a group or has external investors, expect higher documentation standards.

Solvency And Cash Flow

Loans affect your solvency assessment. Before approving or drawing on a related‑party loan, directors should consider the company’s ability to meet debts as they fall due. Regular board reviews and, where required, a formal solvency resolution process help you stay compliant and vigilant.

Security And Priority

If you’re lending to your company, taking security (and registering it on the PPSR) can protect your position if the business ever faces insolvency. A General Security Agreement gives you rights over the company’s personal property; if the loan is secured over real property, speak to your adviser about appropriate registration steps for land.

Tax Treatment And Accounting

Interest paid by the company may be deductible if the borrowed funds are used to produce assessable income; interest received by a director is generally taxable to them. Your accountant will help you get the tax treatment right, but they’ll rely on clear loan documentation and accurate interest calculations aligned with the contract and (where relevant) Division 7A.

Step-By-Step: Setting A Director Loan Interest Rate The Right Way

Step 1: Identify The Loan Direction And Purpose

Is money flowing from the company to a shareholder/associate (Division 7A risk) or from a director to the company (commercial arm’s-length terms)? Clarify why the funds are needed and for how long.

Step 2: Decide On Security And Term

Choose whether the loan is secured and the overall term. For Division 7A loans, the term options are constrained (commonly 7 years unsecured, up to 25 years secured). For director-to-company loans, select terms that match your cash flow and risk profile.

Step 3: Select The Interest Rate

• Company → shareholder/associate: use at least the ATO’s Division 7A benchmark.
• Director → company: choose a market‑aligned rate that reflects security, term and risk.

Step 4: Draft And Sign The Loan Agreement

Include the interest rate, repayment schedule, default interest (if any), early repayment rights, and any fees. If secured, add collateral details in a Secured Loan Agreement and complete any required PPSR registrations promptly.

Step 5: Update Your Governance And Records

Check any internal approvals required under your Company Constitution, minute the board decision, and keep copies of signed agreements and calculations on file.

Step 6: Monitor Payments And Review Annually

Ensure minimum yearly repayments are met for Division 7A loans. For longer director-to-company loans, diarise an annual review of the rate and terms to confirm they remain appropriate.

Key Takeaways

• For company-to-shareholder loans, use at least the ATO’s Division 7A benchmark interest rate and meet all complying loan requirements to avoid deemed dividends.
• For director-to-company loans, set a clear, commercial interest rate that reflects term, risk and security, and record it in a written Loan Agreement.
• If you’re taking security, document it (e.g. a General Security Agreement) and register the interest on the PPSR to protect your priority.
• Review your Company Constitution and any Shareholders Agreement so related‑party loans are properly authorised and documented.
• Board minutes, accurate interest calculations and on‑time repayments are essential to stay compliant and avoid disputes.
• Getting legal help to draft the right agreements and align with Division 7A can save you from costly tax and compliance issues later.

If you’d like a consultation on setting up or reviewing a director loan and interest rate for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.