That old loan in your accounts may not be as secure as you think
- Aug 14
- 8 min read
Loans between family members, trusts, companies and related entities are common in privately owned businesses.
Over time, though, they can become part of the furniture.
A loan might continue appearing on a balance sheet year after year. Everyone involved knows roughly why it is there. Nobody is particularly concerned about collecting it today, so it gets carried forward for another year.
That can create problems.
Depending on the circumstances, time limits can affect whether an old debt remains legally enforceable. At the same time, related-party loans can have tax consequences, including under Division 7A.
For Perth business owners with companies, trusts, investment structures or substantial family assets, this makes old loan accounts worth reviewing rather than simply rolling them forward each year.
Why old loans matter to business owners
Consider some fairly common situations.
You may have personally advanced money to your family trust to purchase an investment.
Your business may have moved money between related entities during a restructure or acquisition.
You may have lent money to an adult child to help them purchase a property or establish a business.
Or a private company in your group may have made an advance to a shareholder or an associate.
These transactions can have very different tax and legal consequences, but they have something in common: the balance appearing in the accounts is only part of the story.
You also need to understand the underlying arrangement.
Who owes the money? Who is entitled to receive it? What were the agreed repayment terms? Is there a written agreement? Have repayments been made? Has interest been charged? Has the balance been acknowledged by the borrower? And does Division 7A or another tax provision need to be considered?
Those questions can become particularly important as a business and family structure gets older and more complex.
A loan balance in the accounts does not tell the whole story
It is easy to look at a balance sheet and assume that an amount recorded as a loan is an asset that can simply be collected at some point in the future.
Legally, it may not be that simple.
Debt recovery is subject to limitation legislation, and the applicable time limits and their starting points depend on the circumstances.
In Western Australia, limitation periods are governed by the Limitation Act 2005 (WA), among other potentially relevant laws.
This matters because an accounting record does not, by itself, answer whether a debt can still be legally enforced.
That distinction is particularly important for long-standing balances where little has happened for several years.
For a business owner, the practical lesson is straightforward: don't assume an old loan remains recoverable simply because it continues to appear in your accounts.
The legal position should be checked by an appropriately qualified lawyer.
The limitation period can become important
The source article highlights a problem that can easily be missed: legal rights to recover a debt do not necessarily continue indefinitely.
Exactly when a limitation period begins, how long it runs, whether it has been restarted or otherwise affected, and which legislation applies are legal questions that depend on the facts.
That is why old loans deserve attention before somebody needs to rely on them.
Imagine, for example, that a substantial amount was advanced between two entities in your family group many years ago.
The amount has remained in the accounts ever since, but there has been little correspondence about it. There may be no current loan agreement, and the people now controlling the borrower may not be the same people who were involved when the money was originally advanced.
If somebody eventually needs to recover that amount, discovering a problem at that point is far less convenient than identifying it during a routine review.
This can be particularly relevant when planning for retirement, succession, restructuring or the eventual administration of an estate.
Family loans deserve particular attention
Family loans are often less formal than commercial loans.
That is understandable. When money is being advanced to a child or another close family member, documenting every term can feel unnecessary.
Ten or 15 years later, however, memories can differ.
One person may remember the payment as a loan. Another may believe it was effectively a gift. The original purpose may be clear, but the repayment arrangements may not be.
There can also be an accounting record showing an outstanding balance without comprehensive legal documentation supporting the arrangement.
For business owners with significant family wealth, that uncertainty can become part of a broader succession and estate-planning problem.
Good records make it easier for your accountant to understand how transactions should be treated. Appropriate legal documentation can also help establish the parties' actual rights and obligations.
The key is not to wait until there is a dispute before finding out what records exist.
Don’t overlook loans between your entities
The same principle applies within a business or investment group.
A typical Perth business owner may operate through several entities: perhaps a trading company, family trust, corporate trustee, investment entity and one or more companies.
Money can move between those entities for perfectly legitimate commercial and investment reasons.
Over many years, however, inter-entity balances can accumulate.
It is worth periodically asking:
What does each loan balance represent?
Is there an agreement supporting it?
Are the terms still being followed?
Have repayments been correctly recorded?
Is interest applicable?
Are the balances reconciled between entities?
Are there tax consequences associated with the arrangement?
Does a lawyer need to review whether the underlying obligation remains enforceable?
This is particularly valuable when preparing for a restructure, sale, retirement or business succession.
A clean set of accounts is useful. A clear understanding of the legal and tax position behind those accounts is better.
Division 7A adds another layer
Private-company loans can also raise Division 7A issues.
Broadly, where a private company lends money to a shareholder or an associate, Division 7A can in certain circumstances treat the amount as an unfranked dividend unless the relevant requirements are satisfied.
The ATO states that, to avoid a Division 7A deemed dividend, relevant loans generally need to be repaid in full or put on complying terms by the required time.
For a complying loan, requirements include a written agreement, an appropriate interest rate and a maximum loan term. Minimum yearly repayments are also relevant.
This is a separate issue from whether an old debt remains legally enforceable.
That distinction is important.
A loan account can therefore require consideration from more than one perspective. There may be accounting questions, tax questions and legal questions.
Rather than looking at each in isolation, it often makes sense for the client's accountant and lawyer to coordinate their advice.
What should Perth business owners do?
You don't necessarily need to turn every old balance into a major project. A sensible starting point is to identify which balances actually deserve attention.
1. Identify outstanding balances
Start with your financial statements and entity records.
Look for loans involving:
shareholders and directors;
family members;
family trusts;
related companies;
beneficiaries; and
other entities within your business or investment structure.
Pay particular attention to material balances that have existed for several years.
2. Find the supporting documents
Once you know what is outstanding, establish what documentation exists.
That might include loan agreements, correspondence, trustee or director resolutions, bank records and records of repayments.
Don't assume that because your accounting software has carried a balance forward, the supporting records are complete.
If the documentation is unclear, speak with your accountant and obtain legal advice where required.
3. Check what has happened since the loan was made
A loan is not just its original transaction.
Review what has occurred since then.
Have principal repayments been made? Has interest been paid? Have the parties communicated about the balance? Have the terms been changed? Is the arrangement being administered consistently with its documentation?
These details may be relevant to both the accounting treatment and any legal review.
4. Review the tax position
Some related-party balances can carry significant tax consequences.
Division 7A is an obvious example for private companies.
The ATO says complying Division 7A loans are subject to requirements including a written agreement and minimum interest rate, with maximum terms generally of seven years for unsecured loans or 25 years for qualifying loans secured by a registered mortgage over real property.
That makes ongoing review important. Establishing a loan correctly at the beginning does not necessarily mean there is nothing more to do.
5. Bring your advisers together
Some issues sit naturally with your accountant. Others require a lawyer.
Your accountant can help identify and reconcile balances, examine their tax treatment and highlight transactions that need further investigation.
Your lawyer can advise on matters such as the enforceability of the debt, limitation periods and the adequacy of legal documentation.
For significant family and related-party loans, having those advisers work from the same information can help prevent gaps between the accounting, tax and legal positions.
Frequently asked questions
Can an old loan become unenforceable?
Potentially. Limitation legislation can restrict the period available to commence legal action to recover a debt. The applicable period and when it begins depend on the particular facts and law, so legal advice should be obtained for an old or potentially affected debt.
Is a loan still valid because it appears in my balance sheet?
An accounting balance alone should not be treated as confirmation that a debt is legally enforceable. Accounting records and legal enforceability are different matters.
Should I document loans to family members?
Good documentation can reduce uncertainty about what was intended and how the arrangement is supposed to operate. Your lawyer should advise on the appropriate legal documentation, while your accountant can advise on relevant accounting and tax consequences.
What about loans between my trust and company?
Inter-entity loans should be reviewed as part of the group's broader accounting and tax position. Depending on the parties and circumstances, tax provisions including Division 7A may need consideration.
What is a Division 7A loan?
Division 7A contains rules that can treat certain payments, loans and other benefits provided by private companies to shareholders or their associates as dividends for tax purposes. The rules are technical, so the treatment depends on the specific arrangement.
How often should business loan accounts be reviewed?
There is no single review frequency appropriate for every arrangement. As a practical accounting measure, material related-party balances should not simply be carried forward indefinitely without considering whether they remain accurate and whether any tax, documentation or legal issues require attention.
Who should review an old family or business loan?
Often both your accountant and lawyer have a role. Your accountant can address the financial records and tax implications, while legal questions such as enforceability, limitation periods and loan documentation should be referred to a lawyer.
Don’t leave old loan balances sitting unnoticed
A loan account that has been sitting in your financial statements for years deserves more than an automatic rollover into next year's accounts.
For Perth business owners with family trusts, private companies and other related entities, reviewing old loans can uncover documentation gaps, tax issues and legal questions while there is still an opportunity to address them.
If you have old family, shareholder or inter-entity loan balances in your accounts, speak with Symmetry about reviewing the accounting and tax position. Where legal issues arise, we can work alongside your lawyer so the different parts of your structure are considered together.
This article contains general information only and does not constitute legal or tax advice. The application of limitation legislation and tax law depends on your circumstances. Obtain professional advice before taking action.
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