Director Loan Accounts – The Issues
What is a Director Loan Account?
A Director Loan Account is when you withdraw money from your company that is not a part of your salary, an expense or a dividend and the amount is more than you have invested into the company. You must keep a record of all the funds you have withdrawn from your Company and this record is commonly referred to as a “Director Loan Account”. Such accounts are listed as an asset in a company’s balance sheet.
The use of a corporate entity to trade a business has many advantages. The main advantage is its ability to reduce a director’s exposure to personal liability. However, directors can become personally liable for “Director Loan Accounts” when their company goes into liquidation.
In a liquidation scenario, a liquidator will issue a demand for any funds owed to the company (which includes Director Loans) and request that it be repaid immediately. If such payments are not received, then it is likely that the liquidator will initiate legal proceedings to recover the amount due.
During times when the company is profitable and generating surplus cashflow, one option to avoid the above situation would be to increase the wages or directors fees being paid and remit the PAYG withholding to the ATO.
If you require any further information in relation to director loan accounts, please do not hesitate to contact our team of lawyers at The Quinn Group on 9223 9166 or submit an online enquiry form today.