Related Party Loan Accounts in Family Businesses: The Hidden Risks and How to Manage Them
- Future Accounting
- Dec 5, 2025
- 5 min read
Updated: 6 days ago
Written by: Chris Mulcahy
How to Manage Related Party Loans in Family Business Structures
In almost every family business, money moves between people, trusts, companies and farms far more often than anyone realises. And yet, one of the least understood elements of these movements is related party loan accounts in family businesses. These can quietly build up over time and create significant tax problems, asset protection issues and even family tension if they aren’t proactively managed.
This article explains what related party loan accounts are, how they arise, why they matter and how you can use them to preserve, protect and grow your family’s long-term prosperity. If you want clarity and confidence in your business structure, this is essential reading.
What are related party loan accounts in family businesses?
A related party loan arises whenever money moves between:
family members
trusts
companies
partnerships
farming enterprises
or, in some cases, SMSFs (with restrictions)
If the movement of money isn’t recorded as wages, dividends, capital contributions or gifts, then it must be treated as a loan.
This means:
If one entity records an asset because money is owed to it, another must record a matching liability because it owes that money.
This simple principle is often overlooked and that’s where issues begin.
Understanding how related party loan accounts in family businesses operate is essential for maintaining financial integrity and reducing risk.
How related party loans commonly arise in family groups
These loans don’t just come from someone handing over cash. They emerge organically from everyday business and family activity:
Unpaid trust distributions (UPEs)
If a trust distributes income on paper but does not physically pay it, the trust effectively owes the beneficiary. This becomes a loan.
Family members paying business costs personally
Parents or children may pay farm or business expenses from personal accounts. If not reimbursed, these payments are internal loans.
Entity-to-entity support
It’s common for one entity to fund another, especially during seasonal or cashflow challenges.
Advances to children
Support for education, vehicles, deposits or general living costs may be intended as gifts, but without documentation they are recorded as loans.
Restructuring and asset transfers
Moving assets within the family group may not involve cash, but it does create internal loan balances.
Loan accounts like these often accumulate quietly until a major decision; succession, refinancing, restructuring or estate planning forces them into focus.
The risks of unmanaged related party loan accounts in family businesses
Unintended asset protection exposure
Loan accounts are real legal obligations. If an individual is owed money (a loan receivable), it becomes exposed in divorce, bankruptcy or litigation. If a business owes money (a loan payable), creditors may demand repayment. Unmanaged balances can expose family wealth in ways no one intended.
Family conflict and relationship breakdown
Poorly documented loans are one of the most common sources of family business disputes.
Typical flashpoints include:
disagreements over whether amounts were gifts, loans or advance inheritances
unpaid trust distributions that beneficiaries never actually received
old loan balances no one recalls creating
fairness concerns between siblings during estate planning or succession
Clear documentation prevents unnecessary conflict and helps families stay aligned.
Division 7A complications when companies are involved
Where a private company is part of the structure, related party loans may trigger Division 7A.
This can occur when:
a company lends money to shareholders or family members
trusts owe money to companies (such as UPEs)
payments or drawings are made without proper loan documentation
To avoid a deemed unfranked dividend, loans must have:
a formal Division 7A-compliant loan agreement
set loan terms
minimum yearly repayments
This is a high-risk area and one the ATO watches closely.
Estate planning complexity
Loan accounts must be addressed in every well-designed estate plan.
Key questions include:
Should loans be repaid to the estate?
Should they be forgiven in the Will?
Do these balances help equalise inheritance between siblings?
Was the original transaction intended as a gift or a loan?
Who legally owns the loan, the individual, company or trust?
Proactive planning removes ambiguity and gives executors clarity and confidence.
Why related party loan accounts in family businesses need regular review
Related party loan accounts aren’t inherently problematic; it’s the lack of management that creates risk.
A strong governance process includes:
annual review of all loan balances
reconciliation across entities
clear documentation of intentions
ensuring Division 7A compliance
linking loan positions to your estate and succession plan
transparent communication with family members
Regular attention prevents decades of confusion and protects the family’s long-term interests.
How loan management supports the Three P’s framework
Preserve
Accurate records help you preserve:
the integrity of your financial statements
clarity around how funds have moved
a clean tax position
When you understand how related party loan accounts in family businesses work, you maintain a stronger financial foundation.
Protect
Proper documentation protects:
personal and business assets
family harmony
the estate administration process
the group from Division 7A issues
Protection comes from clarity.
Prosper
When loan accounts are managed and understood, families can:
restructure with confidence
transition wealth smoothly
plan succession fairly
grow with certainty
Clean financial structures support long-term prosperity.
Practical steps for families to take now
Review and identify all loan accounts across your group.
Clarify whether each balance is a loan, gift, distribution or capital contribution.
Document commercial terms where needed.
Clean up old, unexplained or legacy loan accounts.
Ensure Division 7A compliance for company-related loans.
Review loan accounts annually as part of your year-end planning.
Align loan accounts with succession and estate planning.
Communicate openly with family members so everyone understands expectations.
How this fits into our Future Prosperity process
At Future Accounting, managing related party loan accounts is a key part of our Future Prosperity process. This framework helps families preserve what they’ve built, protect what matters most and prosper confidently across generations.
Understanding and managing related party loan accounts in family businesses is one of the simplest and most effective steps toward building a strong, resilient and future-focused structure.
If you’re unsure how your loan accounts are impacting your tax position, asset protection or long-term succession plan, we’re here to help.
Make an appointment with our team today and take the first step toward clarity, confidence and long-term prosperity.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
