Division 7A bookkeeping means recording every dollar that moves between your company and you (or your family) so it's clear what each one was: wages, a dividend, a business expense, or a loan. If money you take isn't repaid or put on a complying loan by the company's lodgment day, the ATO can treat it as an unfranked dividend.
Most directors don't get caught out on purpose. The books just turn into a mess of transfers, personal card swipes and "sort it out at tax time" entries. This guide is about the recording side: how to keep your director loan account clean in Xero (or any ledger) so your accountant can deal with Division 7A properly.
What is a director loan account? A director loan account is a balance sheet account that tracks money moving between a company and one of its directors or shareholders that isn't wages, a declared dividend or a genuine business expense. A debit balance means you owe the company; a credit means it owes you. Under Division 7A, a debit balance can become a deemed dividend if it isn't repaid or put on complying terms by the company's lodgment day (ATO: loans and other forms of credit).
If you want the bigger picture on running a company, director duties and where Division 7A fits, start with our pillar guide to running a company in Australia: tax, Division 7A and director obligations. This post sticks to one job: what goes in the books, and how.
What Division 7A actually cares about in your books
Division 7A stops private company profits reaching shareholders and their associates tax free. It cares less about what you call a transaction and more about what it really was.
The ATO's view is broad. A "loan" includes an advance of money, credit, or any payment made for you or on your behalf where you're expected to pay it back (ATO: loans by private companies). So the company paying your personal car rego, your kids' school fees or your home internet can all land in the loan account if nobody records them as something else.
The ATO also says each entry in a loan account needs to be analysed, and a year-end balance alone doesn't prove Division 7A does or doesn't apply. The detail matters more than the closing number.
For you, that means three things the books must show clearly:
- What left the company and why. Every personal payment should be coded to the right person's loan account, not buried in general expenses.
- What came back and when. Repayments need real dates and real evidence behind them.
- Who it relates to. Each person needs their own trail.
How private drawings show up in a company's books
If you've moved from sole trader to company, this is where old habits bite. A company is a separate legal entity, so there are no "drawings". Money you take has to be something: wages, director's fees, a dividend, a reimbursement of a business cost you paid, or a loan.
In practice, private spending usually shows up in these ways:
- A transfer from the business account to your personal account with a vague reference like "transfer".
- Personal purchases on the business debit or credit card (groceries, fuel for the family car, holidays).
- The company paying a personal bill directly, such as your mortgage, private health or a speeding fine.
- Cash withdrawals with no receipt or explanation.
Don't code these to expenses just to make the reconciliation balance. If it's personal and not wages or a declared dividend, code it to your director loan account in Xero. That keeps your profit honest and your GST right, because there's no GST credit on private spending.
Keep a separate loan account for each person
This is simple and often missed. If two directors, or a director and their partner, are both taking money out, each of them needs their own loan account.
The ATO is clear that a private company can't use a credit balance in one shareholder's loan account to offset a debit balance in another person's account. Division 7A calculations are done on the transactions in each individual's loan account (ATO: loans by private companies).
In Xero, that looks like:
- One balance sheet account per person, clearly named (for example "Director Loan – Sam Lee" and "Director Loan – Alex Lee").
- No shared "Directors' loans" bucket that mixes everyone together.
Already using one combined account? Don't split it with one big journal. Get the history reworked properly first.
Salary, dividend or loan? Recording it right (and when to hand over)
Here's where bookkeeping and tax advice meet. The books record what actually happened. Deciding what should happen is a tax strategy question.
From a bookkeeping lens, the three main ways money reaches you look different in the ledger:
- Wages or director's fees go through payroll with PAYG withholding (and super where it applies) and are reported through Single Touch Payroll. They're assessable under normal rules, so Division 7A generally doesn't apply.
- Dividends need a documented declaration (minutes or a resolution) and are recorded against retained earnings, not as an expense.
- Loans sit on the balance sheet in the person's loan account until they're repaid, offset properly, or put under a complying agreement.
A Division 7A deemed dividend is generally unfranked (ATO: Division 7A dividends), so letting a balance drift is rarely the best outcome. Speak to your tax agent or accountant about whether to clear it with wages, a dividend, a repayment or a complying loan.
Need someone to tidy up your director loan account before your accountant sees it? Girl Friday Australia is a registered BAS agent, Xero Certified Advisor and Xero Gold Partner with 20+ years in bookkeeping. We work Australia-wide, remotely, with no lock-in contracts. Get a quote or call 0404 877 436.
Complying loan paperwork your books need to support
If a loan is staying on foot, it must be a complying Division 7A loan. Per the ATO, that means:
- A written loan agreement in place before the company's lodgment day for the year the money was taken. There's no set form, but at minimum it should identify the lender and borrower, set out the amount, the term, the requirement to repay and the interest rate, and be signed and dated.
- Interest each year at least equal to the Division 7A benchmark interest rate. The ATO publishes the Division 7A benchmark interest rate each year, so always check the current figure there.
- A maximum term of 7 years for an unsecured loan, or 25 years if the whole loan is secured by a registered mortgage over real property worth at least 110% of the loan (after any prior-ranking debts) when the loan is made.
The lodgment day is the earlier of the company's tax return due date or the date it's actually lodged, so lodging early shortens your window. Your accountant or lawyer prepares the agreement. Your books need to back it up:
- The opening loan balance in Xero should match the amount in the agreement.
- Interest charged each year should be recorded as income to the company and a debit to the borrower's loan account.
- Loans taken in different years may form separate "amalgamated loans" with their own terms, so keep a simple register showing each year's loan amount, start date and term.
- Store the signed agreement with your records (attach it in Xero if you can).
Minimum yearly repayments: real money, real evidence
Once a complying loan is in place, the borrower must make a minimum yearly repayment of principal and interest by 30 June each year, starting the year after the loan is made. If the payments fall short, the shortfall can be treated as a dividend for that year. The easiest way to work out the figure is the ATO's Division 7A calculator and decision tool.
This is where bookkeeping makes or breaks the outcome. The ATO says plainly that journal entries by themselves are not evidence of payments, and you need contemporaneous evidence showing what was paid and when (ATO: make your Division 7A loan payments count). A backdated journal dated 30 June won't be accepted as a payment made on 30 June.
Good evidence usually looks like:
- A bank transfer from your personal account to the company, referenced "Div 7A repayment FY26" or similar.
- That bank line reconciled in Xero against your loan account, not a manual journal.
- Where a repayment is made by offsetting a declared dividend or wages, a dividend declaration (or payroll record) dated before 30 June plus a written offset agreement. The ATO says a book entry only records a transaction; it doesn't create one.
Two more ATO traps: don't borrow from the same company to make your repayment, or repay planning to reborrow a similar or bigger amount. Those payments may be ignored.
Common Xero hygiene mistakes with director loans
We see these often when we pick up a new client's file:
- Personal spending coded to expenses. It inflates deductions and GST credits.
- One combined loan account for multiple people. It hides who owes what.
- "Suspense" or "Ask my accountant" used as a parking lot. Fine for a week, not for a year.
- Year-end journals instead of real repayments. Clearing a loan with a journal and no money moving is exactly what the ATO warns against.
- No interest recorded on complying loans. The interest is assessable income to the company.
- Bank feeds not reconciled. If the bank isn't reconciled, nobody can trust the loan balance.
These are easy to fix early and expensive after a few years. Our bookkeeping services start from $250 a month, and keeping accounts like these reconciled and tidy is part of the job.
EOFY checklist: your accountant pack for director loans
Before your accountant prepares the company return, gather:
- A loan account transaction report for each director, shareholder or associate, for the full year.
- Bank statements showing every repayment, with dates.
- Copies of any signed Division 7A loan agreements and a register of loans by year.
- Interest calculations for complying loans (an ATO calculator printout is fine).
- Dividend minutes or resolutions, with dates.
- Payroll summary for any director wages or fees.
- Any written offset agreements.
- A list of transactions you weren't sure how to code.
Our guide on how long to keep business records in Australia covers the retention rules. For tax return support beyond bookkeeping, see our tax page.
Who this is for, and when to call your tax agent
This guide is for directors of small private companies (including husband-and-wife companies) who pay personal costs from the business account or have recently moved from sole trader to company, and for anyone who's inherited a loan account that doesn't make sense.
Call your tax agent or accountant when:
- Your loan account is in debit and the company's lodgment day is coming up.
- You're deciding between wages, dividends, repayment or a complying loan.
- You've missed a minimum yearly repayment, or you're not sure one was made properly.
- Trusts, unpaid present entitlements or related companies are involved. The ATO notes it's reviewing parts of its Division 7A guidance after a recent High Court decision, so get advice on your exact setup.
FAQ: Division 7A bookkeeping and director loan accounts
Can I just pay my director loan back with a journal at 30 June?
No. The ATO says journal entries by themselves aren't evidence of a payment, and backdated journals won't be accepted. You need real money moving, or a properly documented offset against a declared dividend or wages, before 30 June.
What account type should a director loan account be in Xero?
Usually a balance sheet account, commonly a current asset (it will show a negative balance if the company ends up owing you). Set up one per person and name it clearly.
Is a credit balance in my loan account a Division 7A problem?
A credit balance generally means the company owes you, which isn't the usual risk. But a year-end balance alone doesn't decide it; each transaction still needs looking at.
Can my partner's loan account offset mine?
No. Each person's account is looked at separately, so a credit in one can't cancel a debit in another.
What's the Division 7A benchmark interest rate this year?
The ATO publishes the Division 7A benchmark interest rate each year on its benchmark interest rate page. Check that page, or use the ATO calculator, rather than relying on last year's figure.
Can a bookkeeper or BAS agent fix my Division 7A position?
A BAS agent can clean up the books, separate loan accounts, reconcile repayments and prepare your accountant pack. Decisions about dividends, complying loans and the tax outcome sit with your tax agent or accountant.
Get your director loan account sorted
A clean director loan account takes the stress out of tax time and helps stop Division 7A becoming a surprise bill. If yours has turned into a catch-all, we can untangle it and keep it tidy month to month.
Request a quote, contact us, call 0404 877 436 or email info@girlfridayaustralia.com.