In many Australian private companies, the cheapest funding causes big valuation problems. It creates confusion on the balance sheet.

Shareholder loans, or Division 7A loans, connect capital structure, tax, governance, and even family law. How they are treated can affect equity value, change negotiation power, and impact court results.

At RJD Advisory, we approach shareholder loans through a practical lens:

Are they truly debt in substance? And how would an independent third party treat them?

Understanding Shareholder Loans

What is a shareholder loan?

A shareholder loan is a related-party funding arrangement between an owner and the company. It can take two forms:

• Shareholder lends to the company → recorded as a liability

• Company lends to the shareholder → recorded as an asset

In Australian SMEs, these loans often arise from:

• Capital injections

• Director drawings

• Timing differences in business owner remuneration

• Division 7A arrangements

• Inter-entity funding within groups

They are common because they are flexible. But flexibility often comes at the expense of documentation and commercial clarity.

And that’s where valuation risk emerges.

How they differ from bank debt

Unlike bank facilities, shareholder loans often:

• Lack formal loan agreements

• Have no fixed maturity

• Charge below-market interest (or none at all)

• Are subordinated informally

• Are not enforced in practice

And from a valuation perspective, that matters.

A properly documented, arm’s-length shareholder loan behaves like debt.

An undocumented, interest-free, indefinitely repayable balance may behave more like equity.

The classification affects:

• Leverage ratios

• Discount rates

• WACC

• Equity value

• Family law property pools

In Australia, tax rules like Division 7A for private companies add more complexity. The Australian Tax Office requires documentation, paying interest, and ensuring enforceability.

How Shareholder Loans Affect Valuation

Step 1: Enterprise value

Most business valuations start with enterprise value. This is the worth of operating assets, which relies on sustainable cash flow.

This is typically derived using:

• EBITDA multiples

• Discounted cash flow

• Capitalisation of maintainable earnings

At this stage, shareholder loans are typically not included. However, if their interest significantly affects cash flow, normalisation may be needed.

Step 2: Bridge to equity value

After enterprise value is determined, we reconcile to equity value by adjusting for:

• Interest-bearing debt

• Surplus cash

• Non-operating assets

• Related-party balances (including shareholder loans)

This is where treatment becomes critical.

If the company owes the shareholder, it reduces equity value (it is a liability).

If the shareholder owes the company, it boosts equity value since it’s an asset. This is subject to recoverability.

But the story does not end there.

The Debt vs Quasi-Equity Question

Not all shareholder loans should automatically be treated as “true debt”.

We assess:

• Is there a written agreement?

• Is interest charged at a commercial rate?

• Has interest actually been paid?

• Is there a fixed repayment date?

• Is it subordinated to external lenders?

• Would a third-party purchaser honour it?

If the answer to most of these questions is “no”, the loan may behave more like quasi-equity. Reclassification can materially change value.

For example:

A $800,000 subordinated shareholder loan in a $5 million business may not be worth $800,000 in full if:

• It ranks behind bank debt

• It has no fixed repayment date

• The company lacks free cash flow

A recoverability discount may apply.

This is particularly relevant in distressed situations or family law disputes.

Divorce and Family Law Implications

In Australian family law matters, shareholder loans often create confusion.

A common misconception is that the loan “nets off” perfectly.

It usually doesn’t.

For example:

• If the company has a $1 million receivable from a shareholder, equity value increases.

• But that same shareholder has a $1 million personal liability.

On paper, that looks offsetting. In practice, differences arise due to:

• Tax consequences

• Timing of repayment

• Partial ownership

• Collectability risk

• Division 7A exposure

• Settlement structuring

If the receivable is unlikely to be recovered in full, it may require a discount. That discount impacts both company value and the marital asset pool.

Courts examine substance, documentation, and commerciality, not just accounting entries.

Best Practice for Australian SMEs

To reduce valuation risk:

• Formalise every shareholder loan with written agreements.

• Charge commercial interest (benchmark to RBA cash rate + risk margin).

• Document board approvals.

• Maintain repayment schedules.

• Avoid commingling personal and business expenses.

• Model enterprise-to-equity bridges clearly.

• Understand Division 7A implications.

• Revisit capital structure before transactions or separation events.

Most disputes arise not from the number, but from poor documentation and unclear intent.

To Summarise

Shareholder loans are not just balance sheet entries.

They affect:

• Enterprise value

• Equity value

• Personal net wealth

• Tax exposure

• Divorce settlements

• Banking capacity

• Investor confidence

A $1 million shareholder loan can materially alter equity value, but only if it is real, enforceable, and commercially treated.

How RJD Advisory Supports Family Law Matters

RJD Advisory offers independent and reliable business valuations for divorce and family law matters throughout Australia.

We operate at differing levels depending on complexity:

1. Report Review and Technical Critique

Structured analysis of an existing valuation report to identify:

• Methodological errors

• Unsupported assumptions

• Inappropriate discounts

• Calculation inconsistencies

2. Indicative Valuation

A limited-scope calculation suitable for negotiation strategy and mediation.

3. Full Independent Expert Valuation

Comprehensive, court-ready reports including:

• Income, market, and asset triangulation

• Goodwill allocation

• Normalisation adjustments

• Risk assessment

• Sensitivity analysis

• Forensic procedures where required

Our approach is disciplined and transparent:

1. Confirm valuation date and scope

2. Issue structured data request

3. Conduct management interviews

4. Normalise earnings and assess risk

5. Separate personal and enterprise goodwill

6. Triangulate across accepted methods

7. Deliver clear, defensible conclusions

As a Single Expert, we follow the expert witness code of conduct and give independent opinion evidence.

Practical Takeaways

If a business forms part of your divorce proceedings:

• Lock in the business valuation date early

• Separate personal from enterprise goodwill

• Normalise earnings carefully

• Review working capital assumptions

• Scrutinise concentration risk and key-person dependency

• Consider forensic procedures where appropriate

• Do not rely on generic multiples

Business valuation in family law is not about winning with optimism. It is about grounding negotiations in economic reality.

Final Thoughts

Divorce proceedings are complex enough without uncertainty around business value.

A structured, independent business valuation provides clarity, reduces dispute risk, and strengthens negotiation positions. Disciplined financial analysis is crucial. This applies whether you’re looking at an opposing report or preparing a court-ready opinion.

If you need an independent business valuation for a family law issue in Australia, RJD Advisory can help with support tailored to your case.

📞 Book a free consultation today to discuss a business valuation for your business and the next steps.