Company Invests Funds in Individuals Name

Moving on from the example the other day this time Normas Candles has $300k sitting in its bank account. The yields are soo low Norma wants to get a better return on investment.

So she sets up an online ING Account and invests the $300k sitting in the company in her name. She is happy. Calls her accountant and says are there any issues ? Accountants says "no problems Norma their isn't a tax advantage as you are earning more than the company could and you are on the highest tax rate so no problems" ohh nooo...Norma gets an audit 2 years later

Her accountant calls her one night while she is relaxing having her red wine and tells her "Norma i'm sorry to tell you but it looks like you will be up for around $180k in tax." Then silence.

Norma isn't soo happy anymore

 

I had a client do this because ING don't allow their high interest accounts in company names. It must be common. I told the client they have a Division 7A issue and would be taxed on $300k as a dividend.

A potential way around it is for norma to have acted as bare trustee for the company - but to open the account you probably have to declare you are not acting as trustee.

 

3 other related issues I see
a) private companies guaranteeing loans
b) brokers telling people to get loans in a company name to avoid the NCCP Act and the individual just uses the money
c) company owning a house and a shareholder living in the house

 

And if they didnt put a complying loan agreement in place and make minimum loan repayments in accordance with division 7a they have an UNFRANKED dividend

 

Id be recommending that individual make a voluntary disclosure and seek the Commissioners discretion re the dividends.

Imagine if someone who knew about reported them under the protection provided under the whistle blower legislation and they then get an enormous tax debt.

 

Many years ago I did a loan for a company borrower. It turned out there was a family who had 5 brothers buy a property together in Western Sydney. Their accountant suggested they use a company to own it as the shares of the property could be easily reflected. The trouble was the family was living in this property. It was an acreage, near Badgerys creek too.

They sold it and were taxed on the gains, plus the OSR hit them up for about 5 years worth of land tax. I don't think the company charged them rent either so Div7A.

I suggested they sue the accountant, but he had died a few years prior.

 

What’s the ATO’s general response to such a request?

 

If the Accountant was still alive and operating, could his insurance cover this without the need to sue? Does insurance cover negligence/incompetence?

 

The insurance would only cover tax advice. Is suggesting a company be used to purchase land to live in legal advice or tax advice? I am not sure.

 

Depending on the circumstances ive found the ATO to be quite considerate. Very much less so where the problem is known and ignored.

 

If the accountant hadnt informed them of the impact of division 7a or didnt organise a complying loan agreement or advise on the requirements for minimum loan repayments etc i think the person would have a strong case as that is tax advice

 

Yes you are right. I think it would depend on what they are suing for - which would be mostly tax advice. Loss of the 50% CGT discount, no main residence exemption and deemed dividends!

 

Gentleman, Question along the lines of this topic of when a company lends funds to a Trustee / Trust for investment purpose.

So say you have a bucket company that then lends funds to the trustee / trust to invest those funds and all this is under a complying loan agreement. As I understand the loan agreement can be no longer than 7 years unless secured against property.

My question is if the trustee / trust does not own property can a beneficiary who is also the director of the corporate trustee use there PPOR not held in the trust as security for the purpose of the loan from the Company to the Trustee / Trust?

So if the max loan term is 7 years or even say 25 years when secured is there a way to continue on the loan at the end of the loan term without actually paying down the full amount?
Lets say in this scenario the loan amount grows each year as more funds come into the company or additional loans are established and are lent on to the trustee / trust.
So come end of term you have a fairly large loan or multiple loans to the trustee / trust but problem is its all invested in different assets. Must you liquidate assets at end of term to pay back the company or can you some how roll it over so the funds continue to be invested by the trustee / trust?

 

Not sure I understand but a trustee could borrow elsewhere to repay a div 7A loan tons related company

 

I am repaying the loan to the bucket company to be compliant with Div7 loan agreement. But really I don't need those funds in the bucket company and would only want to lend them back to the trustee / trust to further invest.

Of course I could borrow funds from the Bank that I on lend to the Trustee / trust to pay the company back. But then I would be paying interest on money that would just be sitting in the bucket company anyway.

 

Thats one of the issues with division 7a. One day that chicken comes home to roost

If an accountant is going to use division 7a as part of tax planning i dont have an issue with that.

If they fail to assist in dealing with the cashflow issues of repaying those loans then they didnt exercise full due care in my opinion.

Chris wallis who is a barrister made that very point in his comment on my linkedin

Michael A. on LinkedIn: Nigel has a good year and makes a $200k profit from his construction | 11 comments

 

I guess the trust can repay the company and the company itself can always invest - or lend to another company to invest.

 

Thanks @Terry_w . I use the company to hold interest earning investments such as the contributory mortgage funds I invest in and the trust to invest in investments that have a capital gain component. If I move those investments to a company I loose the capital gains discount. So not ideal.
Bit of a tricky situation to try and come up
With the best outcome.

 

You can't always have your cake and eat it too.

You could keep injecting money into the trust to help it pay back its loan to the company. This could be in the form of a loan or a gift.

 

Well what fun is that. What’s the point of having cake if I can’t eat it.

I guess I will have to work out a cashflow plan to ensure that the strategy works within the compliance framework.

I already injected all the money I have into the trust to invest and I re invest all the spare money that I receive from the trust distributions.

I was hoping there was some work around since I am not looking at using the loans for personal use but rather to invest. But it appears not.

Thank you for the feedback gentleman.