How can a company clear a Director's Loan Account when it cannot repay the director?

 Author: PollyATO(Community Support)Community Support

17 June 2026

Hello @TaxDark_,

There are a few ways a director’s loan account (where the company owes the director) can be reduced or cleared. Each option has different tax and legal consequences.

Common options include:

Repayment:

• The company repays the loan when it has sufficient funds.

Loan forgiveness:

• The director can choose to forgive the debt. In most cases, this is treated as a capital contribution to the company.
• The company generally doesn’t include the amount as assessable income, and the director doesn’t receive a tax deduction.

Conversion to share capital:

• The loan may be converted into equity (shares). This requires the company to issue shares to the director and update its share records.

There are additional considerations if a loan is forgiven, the commercial debt forgiveness rules may apply. These don’t generally create taxable income but can reduce tax attributes such as prior year losses.

Converting a loan to shares must be supported by appropriate company resolutions, share registers and valuations. Depending on the circumstances, there may be capital gains tax (CGT) implications for the director. The classification of the original loan under the debt and equity rules (Division 974) may also affect the outcome.

You should ensure appropriate documentation is in place, such as:

• board minutes or resolutions
• accounting records
• updated share registers (if converting to equity)

Because the tax outcomes can vary depending on how the loan was structured and recorded, you may need to confirm the treatment for your specific situation.