The term “loan account” is very broad and often used to cover multiple scenarios, which can sometimes make it difficult to grasp.
Very generally, a shareholder's loan account would represent the amount that the business owes you as a shareholder or director, and/or the amount you owe the business.
Additionally, although they are not “loans” in the technical sense, trust beneficiary accounts are sometime colloquially spoken of as loans also.
Your loan account could be made up of amounts you have loaned the company, or amounts it has loaned you, expenses it has paid on your behalf (or vice versa), profits credited to you that haven’t yet been withdrawn in cash (perhaps to assist in funding operational activities), or contributions towards fringe benefits, just to name a few.
Amounts that the business owes you are called “credit” loan accounts (these are liabilities on the balance sheet of the company). This represents what the entity will repay you at some time in the future (assuming solvent). There is no necessity for the entity to regularly repay you amounts on this loan.
Amounts that you owe the business are called “debit” loan accounts (these are assets on the balance sheet of the company). These types of loans can have some requirements associated with them under tax law. When amounts are drawn from a company and the overall tally of the amounts drawn over the year result in a “debit loan”, specific tax law provisions kick in – Division 7A of the ITAA, commonly called “Div 7A”.
When properly understood and managed, an amount you owe the company isn’t necessarily a cause for concern. Even though these rules are directly associated with companies, they can apply to certain types of loans between companies and trusts also.
So, what do you need to do? If you are required to take action in relation to loans, your C&N Advisor will discuss this with you and will guide you through the recommended management of the loan. This may be through actions such as repayment in full, a loan agreement over a set time, paying out profits to you, or a combination of these actions.
The one key thing that you can do to ensure that your loan is managed effectively is to regularly review the transactions recorded against your loan (or “drawings”) to ensure that they are indeed personal, especially if you have a bookkeeper or third party recording your accounting transactions. This is recommended to be undertaken regularly, so that errors are corrected while the transaction is fresh in your memory. This can assist your advisor manage any amounts drawn when planning with you at year end.
Another tip to ensure your loans are managed in the most effective possible way is to contact your advisor before any large personal acquisitions that you are planning to use business funds for.
If ever unsure, please don’t hesitate to chat to our team.
