Related-party loans and directors' current accounts: what Singapore SMEs need to know

What a director's current account actually is

A director's current account is simply the running balance between a company and one of its directors — every cash drawing, personal expense paid from the company account, reimbursement owed to the director, or informal injection of funds gets posted to it. Over a year it can move in both directions, and in many owner-managed companies it becomes a catch-all: the entry the bookkeeper uses when a transaction doesn't neatly fit salary, dividend or expense.

That convenience is exactly the problem. A current account is a related-party loan in substance, whichever direction it runs, and it is subject to the same legal and tax rules as any other loan between the company and its directors or shareholders.

The Companies Act restriction on loans to directors

Section 163 of the Companies Act generally prohibits a Singapore-incorporated company (other than an exempt private company with no corporate shareholder) from making loans, quasi-loans, credit transactions or guarantees for the benefit of:

• its own directors, or directors of a related company in the same group;
• family members of those directors — spouse, children and step-children; and
• companies or LLPs in which such a director (together with family members) holds a 20% or more voting interest, where the lending company is not itself an exempt private company.

The restriction is drawn broadly on purpose. A "quasi-loan" — the company paying a bill the director should have paid, on the understanding the director reimburses it — is caught just as a straightforward cash loan is. So is a credit transaction such as the company letting a director defer payment for goods or services, or the company guaranteeing a director's personal borrowing.

The exemptions — and how approval works

The restriction is not absolute. A loan to a director is permitted without breaching the Act in four situations:

• Business expenditure — funds advanced to meet expenditure the director incurs for the company, or to properly perform their duties (a travel float, for example).
• Home acquisition — a loan to a full-time director of the company or a related company to buy a home to live in, limited to one outstanding transaction at a time.
• Employee benefit scheme — a loan to a full-time director under a scheme that benefits employees generally, and that scheme has been approved at a general meeting.
• Ordinary course of business — where the company's business is regulated money-lending (banking, finance or insurance, or MAS-regulated activity) and the loan is made on ordinary commercial terms.

Outside these categories, a loan to a director (or to an entity in which a director has a 20% interest) can still go ahead if it is approved by shareholders at a general meeting, with the purpose and amount disclosed and the interested director and their family members abstaining from the vote — unless every shareholder has voted to approve it. If approval is not obtained by the next AGM, the amount advanced must be repaid within six months of that AGM's conclusion.

Directors also carry a standing duty to disclose any interest, direct or indirect, in a transaction with the company — including a loan to themselves or a related person — at a directors' meeting, and to notify the company of the nature and extent of that interest as soon as practicable.

What happens if the restriction is breached

The consequences fall on the directors who authorised the loan, not just the company:

• A director who authorises a loan outside the permitted exemptions and approval process commits an offence, punishable by a fine of up to $20,000 or up to 2 years' imprisonment.
• Directors who fail to disclose an interest as required face a fine of up to $15,000 or up to 3 years' imprisonment, plus a further $1,000 for each day the non-disclosure continues after conviction.
• A director found to have breached their duty to act honestly in taking a loan from the company can be held personally liable for any resulting loss or improper profit.

These penalties are a strong reason to treat a director's current account as a governance matter, not a bookkeeping convenience — and to get it approved and documented properly before the balance builds up.

How IRAS taxes interest-free director loans

Even where a loan is permitted under the Companies Act, it can still create a tax liability. Under the Income Tax Act, directors are treated as employees, so a benefit derived from an interest-free or subsidised loan provided to someone in their capacity as director is a taxable perquisite of employment.

IRAS computes the taxable interest benefit using the average prime lending rate, or from 1 April 2023, the 3-month compounded SORA plus a 1.5 percentage point spread, applied to the loan balance outstanding month by month. Where a loan is repaid in instalments, the benefit is apportioned accordingly — a $300,000 interest-free loan that runs for a full year can easily generate a taxable benefit in the five-figure range, reportable as the director's employment income for that year.

Shareholder loans: the safer route, if the facts support it

There is one important carve-out: if a loan is made to an individual genuinely in their capacity as shareholder rather than director, the interest benefit is not taxable as employment income. But IRAS treats this as a question of fact, not a label you can simply write on the transaction. In practice, IRAS looks for:

• A genuine debtor-creditor relationship — a real expectation of repayment, ideally with a repayment schedule, rather than a loan that quietly never gets repaid.
• Loans extended to all shareholders (including those who are directors) on similar terms, sized pro-rata to shareholding — not by seniority or role in the business.
• Contemporaneous documentation that the loan was made in a shareholder capacity — shareholders' resolutions or meeting minutes, not just a board minute approving a "director's loan scheme".

Where a loan is only extended to directors, or to one shareholder-director in an amount that bears no relation to shareholding, IRAS will typically treat it as a director's loan and tax the interest benefit accordingly — regardless of what it is called internally.

When a director or shareholder lends to the company

The restrictions above only run one way. A director or shareholder funding the company — common for startups and family businesses in their early years — is straightforward: it needs board approval, can be structured as interest-free without any tax issue for the company, and does not trigger Section 163 at all. The main things worth getting right are a short loan agreement setting out the amount, term and any interest, and clarity on whether it ranks as debt or is intended to be capitalised into equity later — the two have very different implications on a sale, restructuring or winding up.

Why the bookkeeping matters as much as the law

In our experience, most director's current account problems are not deliberate — they build up because drawings and reimbursements are netted off casually through the year with no running reconciliation. That creates three practical issues:

• It looks like undocumented remuneration. A current account that only ever grows, with no repayment terms, resembles disguised salary or dividends — inviting IRAS to recharacterise it and query why payroll or dividend tax wasn't applied.
• It is a related-party disclosure. Amounts due to or from directors are related-party balances and need to be disclosed in the notes to the financial statements, whether or not the company is audited.
• It is a routine audit and review point. Auditors and reviewing accountants will ask for the terms of the loan, evidence of Companies Act approval where required, and how the tax treatment was determined — an unreconciled, undocumented balance is one of the more common queries we raise with SME clients.

Getting a current account under control

None of this requires heavy process. A workable approach for most SMEs:

• Document it from the first drawing — a one-page loan agreement or board/shareholder resolution recording the amount, purpose, interest rate (if any) and repayment terms.
• Decide the capacity deliberately — if you intend to rely on the shareholder exemption, extend the loan pro-rata to all shareholders and record it in a shareholders' resolution, not just board minutes.
• Either charge a market rate or accept the taxable benefit — there is no legal requirement to charge interest, but going in with eyes open avoids a surprise at tax filing time.
• Reconcile the balance monthly, the same as any other loan account, rather than clearing it in a year-end journal.
• Route anything director-related through the approval process above the exemption thresholds, and record the disclosure of interest at the next directors' meeting.

The bottom line

A director's current account is a real loan in the eyes of both the Companies Act and IRAS, even when it started as a few informal drawings. Getting the approval, documentation and tax capacity right at the outset costs very little; sorting out an undocumented, growing balance at year-end — often under audit or IRAS scrutiny — costs considerably more.

At Chua and Lee Associates, we help Singapore SMEs and family businesses structure director and shareholder loans correctly, obtain the right approvals, and keep current accounts reconciled and disclosed. To learn more, see our Corporate Secretary services and Tax services.