Guide · 5 min read
Shareholder and director loans in Xero
Money moving between a company and its owners is the most common loan in a small business. A shareholder puts money in to fund the company, or a director takes money out. Xero handles both with a balance sheet account and a manual journal each month. The care is in keeping each person's account clear, charging interest the way the agreement says, and knowing when a low rate has tax consequences.
- Give each shareholder or director their own loan account.
- A liability when they lent to the company; an asset when the company lent to them.
- Post interest monthly, as the agreement says, with a manual journal.
- A loan at a low rate, or none, can have tax consequences in South Africa. Check before you set the rate.
Setting up the account
Create one account per person in the chart of accounts, named so nobody has to guess, such as "Loan from J Smith". A single shared "Director's loan" account makes it impossible to see who owes what.
- The shareholder lent money to the company: a liability. Money they pay in, and company expenses they pay personally, are coded to it.
- The company lent money to the shareholder or director: an asset. Money they take out, other than salary or dividends, is coded to it.
A director's account can cross over from one side to the other. If a director takes out more than they put in, the company is now lending to them. In South Africa, financial assistance by a company to its directors usually needs a special resolution of the shareholders and the board to be satisfied that the company stays solvent and liquid (section 45 of the Companies Act). Have that in place before it happens, not after.
Posting the interest
Interest works exactly as for any other loan: work out the month's figure, then post a manual journal dated the last day of the month.
Example: a shareholder lent the company R300,000 at 9% a year. September has 30 days, so the interest is R300,000 × (0.09 ÷ 365) × 30 = R2,219.18. The company owes it, so the journal is:
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 2,219.18 | |
| Loan from J Smith | 2,219.18 |
For a loan the company made to a director, the journal is the other way round: debit the loan, credit interest income. How to post loan interest in Xero walks through the screens, and the loan interest calculator works out the figure for any dates.
If the lender lives outside South Africa, interest the company pays them may be subject to withholding tax, which the company deducts and pays over to SARS.
Loans at a low rate, or none
Shareholder loans are often interest-free. That is fine in the books, but South African tax law looks at some of them closely. In broad terms, measured against the official rate of interest (the repo rate plus one percentage point):
- A company lending to a shareholder, or to a person connected to them, below the official rate can be treated as paying a dividend equal to the interest it did not charge, with dividends tax for the company to pay.
- A director or other employee with a low- or no-interest loan from the company can be taxed on the difference as a fringe benefit through payroll.
- A person lending to a trust connected to them, below the official rate, can be treated as making a donation each year, with donations tax.
At year-end
- Confirm the balance with each person in writing, including the interest posted.
- Make sure every month's interest is posted up to the year-end date.
- If the loan is repayable on a set date, split it between current and non-current, as your accountant advises.
- Keep the loan agreement and the resolutions with the financial statements.