A director's loan account can show money owed in either direction. The lending restrictions and deemed-interest rules discussed here concern loans or advances by the company to the director, rather than a director lending money to the company. Check the company-law lending restrictions and the income-tax treatment separately. A permitted loan can still have tax consequences.
Company law
Section 224 of the Companies Act 2016 provides that a company shall not make a loan to a director of the company or of a related company, or give a guarantee or security in connection with such a loan made by another person. The exceptions include an exempt private company; funds for company expenditure or properly performing the director’s duties; and, for a director in full-time employment of the company or its holding company, qualifying home-acquisition funding or a loan under an approved employee-loan scheme. The applicable purpose, resolution and approval requirements must be satisfied.
Income tax
For section 140B, “director” has the specific meaning in subsection 75A(2): it combines a director or management role with ownership or control, alone or with associates, of at least 20% of the ordinary share capital. It does not automatically include every person described as a director under company law.
HASiL's Public Ruling No. 8/2015, Loan or Advances to Director by a Company, explains that a company which provides loans or advances to its directors without interest, or at an interest rate lower than the arm's length rate, is deemed to receive interest income where the loans or advances are funded from internal funds. The ruling states that section 140B does not apply to externally funded loans or advances. For mixed funding, identify and support the internal-funds portion. Where section 140B applies, compare the interest due and payable with the amount calculated from month-end balances using the prescribed average lending rate, and use the higher amount. Other tax provisions may still be relevant.
Before making an advance, document its purpose, the recipient’s relationship to the company, required approvals, funding source, interest terms and repayment arrangements. For an existing balance, establish how it arose before deciding its treatment. Director balances are also relevant to related party disclosures in the financial statements.
This article is general information only. Requirements depend on each company's circumstances; please refer to the official guidance from SSM and HASiL, and see Saifudin & Co's tax advisory and compliance services if you would like assistance.