Borrowing money to contribute equity to a private company

Discussion in 'Accounting & Tax' started by Harry30, 31st Mar, 2018.

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  1. Harry30

    Harry30 Well-Known Member

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    If you have established a private company to invest in real estate (and wholly own the private company) and you personally borrow money to make initial and ongoing equity contributions to the company, is the interest on the borrowed funds tax deductible by the shareholder? I assume this is no different to buying shares on ASX in which case the interest on any borrowed funds is ordinarily tax deductible (although what is happening here is akin to a rights issue where the company’s equity capital expands on the back of ‘new’ shares purchased by the shareholder). The contributions are so the company has sufficient initial funds to finance the 20% deposit + costs on real estate purchases. Remainder of the real estate purchase by the company is funded by the company via the normal way using a company loan. The company is profitable and will eventually pay dividends to the owners, but has not done so yet.

    Does this issue depend on whether the company pays dividends? Is a reasonable expectation of future dividends sufficient?
     
  2. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Interest is only deductible where you are expected to receive a dividend. Are you borrowing to buy shares?

    Why not borrow and onlend to the company as it would be safer from a legal and taxation point of view.

    See
    Tax Tip 40: Tax Issues with Injecting money into Private Companies Tax Tip 40: Tax Issues with Injecting money into Private Companies
     
  3. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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  4. Harry30

    Harry30 Well-Known Member

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    Yes, I am buying shares in the company. Own 100% of the shares now. I am putting money into the company so it has some initial and ongoing capital. The company will pay dividends but has not done so yet. Did not think about just lending to the company which may be safer, so will consider. One consideration here is that I want company to remain profitable, as any losses could be an issue wrt to future borrowing (banks always ask for an accountants letter around whether the company is profitable. Not sure losses are a show stopper but just don’t want to open up issue). Lending to the company v just contributing capital impacts company profitability so will need to consider that issue (am assuming any lending to company will be arms length and based on market rates). Tips thread was useful as always. Thanks.
     
    Last edited: 31st Mar, 2018
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