Director loan interest rates in Australia and your compliance obligations

Moving money between a company and its directors or shareholders is routine in small Australian businesses. A director tops up company cash flow during a slow quarter, or the company advances funds to a shareholder who needs money before year end. Either way, the interest rate on that loan is not a detail you can leave to the accountant's spreadsheet, because the law sets firm requirements for one direction of lending and clear commercial expectations for the other.

The obligations split cleanly. When a private company lends to a shareholder or their associate, Division 7A of the Income Tax Assessment Act 1936 (Cth) applies, and the loan must meet strict criteria, including a minimum interest rate, or it is treated as a dividend. When a director lends to their own company, there is no statutory benchmark, but the rate must be a defensible commercial one and the loan should be documented. This guide sets out who these obligations apply to, the duties themselves, what happens if you miss them, and the compliance steps to put in place now.

Who the obligations apply to

Work out which direction the money is moving first, because the obligations are different in each case:

Company to shareholder or associate: Division 7A applies to loans made by a private company to a shareholder, or to an associate of a shareholder such as a family member, spouse or related entity. Under s 109D, a loan includes an advance of money, the provision of credit or any other financial accommodation, and any payment made for a person where there is an obligation to repay.
Director or shareholder to the company: no Division 7A benchmark applies. The obligation is to set an arm's-length commercial rate and record it in a written agreement.
Trusts and interposed entities: Division 7A can also reach loans made through trusts, interposed entities and closely held corporate limited partnerships, so check the whole structure before assuming the rules do not apply.

The key trigger for the company-to-shareholder rules is timing. A deemed dividend arises only if the loan is not fully repaid before the company's lodgment day for the year the loan is made (s 109D(1)). Lodgment day is the earlier of the due date for lodging the company's income tax return and the date the return is actually lodged. If the loan is repaid before that day, Division 7A does not bite.

Charge at least the benchmark interest rate

The central duty for a company lending to a shareholder or associate is that the rate of interest on the loan must equal or exceed the Division 7A benchmark interest rate for the year (s 109N(1)(b)).

The benchmark is not a figure the ATO chooses at will. It is the Reserve Bank of Australia's Indicator Lending Rates, Bank variable housing loans interest rate, being the rate last published before the start of the income year (s 109N(2)). The ATO publishes the rate each year, and the most recent rates for companies with a 30 June year end are:

2026-27 income year: 8.77 per cent
2025-26 income year: 8.37 per cent
2024-25 income year: 8.77 per cent

Two details matter in practice. First, the benchmark is a floor, not a target. Charging above it is fine; charging below it puts the loan outside the safe harbour. Second, the rate must hold its ground in later years. The ATO's guidance is that the interest rate payable for each year of the loan must at least equal that year's benchmark, so a fixed rate agreed in a low-rate year can fall short of a later year's benchmark and put the loan offside. It is worth reviewing the rate against the current benchmark every year, not just when the loan is made.

Execute a written loan agreement before lodgment day

Interest rate aside, the loan will not be a complying loan unless the agreement it was made under is in writing and is in place before the company's lodgment day for the year of income in which the loan was made (s 109N(1)(a)). There is no prescribed form, but the ATO's guidance is that the agreement should, as a minimum:

identify the parties
set out the amount and term of the loan
record the requirement to repay and the interest rate payable
be signed and dated by the parties.

The agreement can be drafted to cover loans to be made over a number of future income years, which avoids re-papering every year. A payment made during the year, including money drawn from a director's loan account, can still be converted into a complying loan before lodgment day, so the deadline is real but not fatal if you act before it.

Cap the term at seven or 25 years

The loan term must not exceed the maximum term for that kind of loan (s 109N(1)(c) and (3)):

7 years: for an unsecured loan or any other loan
25 years: only where 100 per cent of the loan is secured by a registered mortgage over real property, and when the loan is first made the market value of that property, less any liabilities secured over it in priority to the loan, is at least 110 per cent of the loan amount.

There are also specific rules for refinancing, including converting an unsecured loan into a mortgage-secured loan to extend the term, and for reducing the term when a secured loan is converted back to an unsecured one. If you are restructuring an existing shareholder loan to take advantage of the 25-year window, it is worth having the calculations checked, because the term reduction rules are easily misapplied.

Make the minimum yearly repayment

A complying loan does not become a problem only in its first year. For each income year after the year the loan is made, the shareholder must pay at least the minimum yearly repayment (MYR), or the shortfall is treated as a dividend (s 109E).

The MYR is the amount needed to repay the loan, principal and interest, over its remaining term, calculated using the current year's benchmark interest rate. It is recalculated every year, because both the benchmark rate and the remaining term change. The ATO's Division 7A calculator works it out for you, and your accountant should be able to produce the figure for each loan each year.

Two practical points. The MYR is worked out on each amalgamated loan separately, so loans made in different years cannot be grouped. And the ATO will not accept a backdated journal entry as a repayment, so the money needs to actually move before the end of the income year.

Set an arm's-length rate when the director lends to the company

When a director or shareholder lends money to their own company, there is no Division 7A benchmark to apply. The obligation is to set a rate that two unrelated parties would agree to in the circumstances, and to record it in writing.

Factors that support a defensible rate include:

Security: an unsecured loan normally carries a higher rate than one secured over assets or property
Term: short-term working capital support is often priced differently from multi-year funding
Market conditions: reference what a bank or private lender would charge a business of similar size, risk and security
Purpose and cash flow: volatile revenue or a thin balance sheet can justify a higher margin.

A zero per cent or token rate is not automatically unlawful, but it creates real problems. It can blur the line between debt and equity in the accounts, distort the company's true financial position, and cause friction between founders who lent on different terms. A documented commercial rate, with the agreement signed and the interest calculations kept, makes the tax treatment straightforward for your accountant and the position clear to any later dispute.

Register security on the PPSR within time

If the director's loan to the company is secured over the company's personal property, the security interest should be registered on the Personal Property Securities Register (PPSR). Timing is not optional. Under s 588FL of the Corporations Act 2001 (Cth), a security interest granted by a company can vest in the company if the company enters external administration within six months of the interest being created and the interest was not perfected within 20 business days of the security agreement coming into force. In practical terms, the security is lost and the director becomes an unsecured creditor.

Two further points. Registration only protects the personal property covered by the PPSR; security over real property is taken by a registered mortgage under the relevant state or territory land titles system. And the 20 business days run from when the security agreement comes into force, not from when you get around to it, so diarise the registration at the same time you sign the agreement.

Follow governance rules and directors' duties

A related-party loan is not just a tax matter. Directors owe duties under the Corporations Act 2001 (Cth): to exercise care and diligence (s 180), to act in good faith in the best interests of the company (s 181), and not to improperly use their position or information (ss 182 and 183). The board should satisfy itself that the loan is fair to the company and properly authorised.

Separately, Chapter 2E of the Corporations Act requires member approval before a public company, or an entity it controls, gives a financial benefit to a related party such as a director or their family. A standalone proprietary company is generally outside Chapter 2E unless it has crowd-sourced funding shareholders, in which case the rules apply as if it were a public company (s 738ZK). Even where member approval is not required, checking your constitution and any shareholders agreement, and recording the board's decision in minutes, protects the directors and keeps the loan defensible.

What happens if you get it wrong

The consequences of a non-complying loan are the reason the interest rate matters:

Deemed dividend: if a company-to-shareholder loan does not meet the complying criteria, the amount outstanding is treated as a dividend paid by the company (s 109D), and a missed MYR in a later year treats the shortfall as a dividend (s 109E). The deemed dividend is an unfranked dividend, taxed at the borrower's marginal rate with no franking credits to offset it, and it can push a director into a significantly higher tax position than the loan ever cost the company.
A capped dividend: the total of Division 7A deemed dividends is limited to the company's distributable surplus for the year, which can reduce but not remove the exposure.
Lost security: a PPSR interest registered late vests in the company on insolvency (s 588FL), leaving the lending director unsecured.
Director-level exposure: a loan that is unfair to the company can expose directors to claims for breach of duty, and to scrutiny from the ATO and, in an insolvency, from a liquidator.

Compliance checklist

Run through this checklist for each loan and advance:

Identify every loan, advance and unpaid balance to shareholders and associates, including director loan accounts.
Check each loan's interest rate against the current benchmark before lodgment day.
Confirm a signed written agreement exists for each loan, dated before the relevant lodgment day.
Check the term against the seven-year or 25-year maximums and any refinancing rules.
Calculate the MYR for each loan each year, using the ATO calculator or your accountant.
Register any PPSR security within 20 business days of the agreement coming into force.
Minute the board's approval of the loan, including the rate, term and security.
Review the rate and repayments annually, and watch for changes in ATO guidance.

Where a lawyer and accountant help

Division 7A is a compliance regime where the accountant and the lawyer do different jobs. Your accountant will calculate the MYRs, confirm the benchmark rate for each year and prepare the company's tax position, and should flag any loan account that has not been documented. A lawyer should draft the loan agreement itself, advise on the term and refinancing rules where the loan is being restructured, prepare any security documents, and handle the governance side, including the board minutes and any constitution or shareholders agreement issues. For a loan that has already gone offside, tax and legal advice before the lodgment day can still convert it into a complying loan, so early engagement matters more than perfection.

The lodgment-day deadline you cannot miss

If there is one obligation to act on this week, it is the written agreement deadline. The rate, the term and the repayments can all be fixed or calculated later, but an agreement that is not in writing before the company's lodgment day cannot be backdated into compliance, and the ATO is explicit that backdated journal entries and paper-only adjustments will not be accepted as repayments. Pull your director loan accounts now, check that each balance is covered by a signed agreement dated before the relevant lodgment day, and confirm the rate still meets the current benchmark. The ATO is currently reviewing its Division 7A guidance following the High Court's decision in Bendel, so if your loan structure relies on anything unusual, this is the year to have it checked.