Business profits and PPOR offset accounts

Hi all,

Hoping someone here might have experience in putting business profits (specifically a private company) into good use in reducing PPOR interest.

I’m a director/shareholder of a profitable small private company which has significant cash reserves that are currently doing very little for the company or anyone else.

Also happen to have a large mortgage on my PPOR. I do receive dividends annually from the company and they get put to good use for both offset and general living expenses.

There is enough in the company cash reserves to completely offset my PPOR home loan but I suspect there is no easy way to make this happen that wouldn’t run afoul of div 7A.

I am planning to get formal advice but interested to know if anyone else in this situation has had any success or whether I should just forget this dream already.

Thanks
adamw

 

Not advice. But..
1.if on 01/07/20xx you transferred business funds to offset acc and sat them there all year.
2.28/06 transfer back.
3. Year end 1 vs year end 0 there has been no loan, even though funds have been out of company all year. 30 June back statement shows funds in place.

 

This only works once though.

 

It may make sense to allow the company to refinance the bank loan.

 

I don't know of anyway this could be done, other than a once off loan which isn't repeated.
You might have to weigh up the costs of paying tax v paying interest.

Also not good that you are the shareholder - assuming you are not trustee. You may want to consider changing shareholders to that of a trustee of a discretionary trust which the company can then distirbute to and you can get the money out more tax effectively.

 

Borrow from the company and pay back the bank?

Great idea!

 

But the div 7A rates would be higher from the company than the bank. However you would be paying interest to a related entity - but this would be taxable and you could not claim the interest.

 

Yes but company only taxed at 27.5% on the division 7a interest income whereas a dividend might be taxed at 45% (with 27.5% franking credit so additional 17.5% tax). But remember after year 1 going to need to pay minimum loan repayments which include interest and principal (and generally doing a dividend to meet those obligations ) so worth running the numbers

But as the dividend is streamed over 7 years the top up tax may be lower. If at 30% bracket it would be an additional 2.5 %.

As @Terry_w says consider whether it is worth using the small business concessions to rollover the share to a discretionary trust for asset protection. Side benefit is that the dividend might be able to be streamed to a lower taxed individual.

Sums might work. Worth checking

 

Division 7a has some integrity provisions such that if this is recycled you are caught anyway.

 

May also be some FBT concerns if the money comes out and back during the year with no interest. Would need to consider the FBT interest rate (slightly different to the Div7A rate) as well to avoid a loan fringe benefit.

 

Yes and the D7A rate initially looks unappealing (ie 5.3% v mortgage at 4.5%) BUT the compounding benefit is where the untaxed fringe benefit exists. Higher income taxpayers can repay the D7A minimum using dividends. Its really a strategy for highly profitable businesses. Sometimes

 

Thank you all for the insights. Sounds like a complex area where I’d be foolhardy to jump into anything without further advice and analysis.

I’ll definitely seek further advice before taking any action.

Thanks again
adamw