Draw Vs. Loan - What's The Difference?

A way to take money out of a company is through a loan and it’s quite complex. If you have a company structure you might have heard your accountant talk about this thing called Division 7A, or maybe a frustration with company loans. 

Division 7A basically says you can’t just rip money out of a company with no recourse as a loan. We’ve got to pay that back over time and with a minimum amount of interest and the rate is set by the ATO.

How that looks on a practical level is, if you were to borrow $100,000 from your company and it was an unsecured loan, you have to pay that back within seven years and with interest. Make sure you are meeting the minimum repayments for that loan. It can be quite tricky and we feel it’s a short to medium-term way of taking money out of a company. There are better ways or better strategies we can use to not get ourselves stuck in this Division 7A problem and if you’ve got it, you will know about it.

We also have loans from trusts and we call these ‘Owner Drawings’ – a common bookkeeping term where we literally take the $100,000 out of the trust’s bank account, there’s no Division 7A requirements or anything like that to actually repay that money. It’s great to see trusts are a little bit more flexible when it comes to loans.

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