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Debt recycling by loaning money. Is it possible?

Discussion in 'Accounting & Tax' started by Mitchell, 5th Aug, 2016.

  1. Mitchell

    Mitchell Active Member

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    There is a lot of talk on here about recycling non deductible debt by purchasing income producing assets.

    Instead of using the funds to invest in shares or other income producing assets, would it be possible to loan funds to a separate entity and generate income by way of interest repayments?

    Say you were paying 5% interest to your bank and loaning the funds at a rate of 10%, you'd be earning a return of 5%. Could this be used to recycle debt?
     
  2. Jerry O

    Jerry O Well-Known Member Premium Member

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    Will you be in a business of loaning funds to others? I would think that that would classified as a business loan and will be taxed accordingly. But I could be wrong. Let's wait for others, i am interested to know as well..
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If the end result is a tax benefits anywhere it may be a scheme so seek advice before acting
     
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  4. Mitchell

    Mitchell Active Member

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    I just had the idea after seeing a show recently where people were loaning funds to start up businesses. I remembered reading the thread on debt recycling and couldn't remember if this arrangement had been discussed.
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    I take the point of loaning $ to a separate entity as no different from a loan between a company & its directors however as the person on-lending the funds, what security is being put up for either side of the loan eg is it your house with a LOC & the other party is providing a second mortgage? How is the loan documented?
     
  6. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    If it is a genuine loan to a third party then I don't see any issue with it from a tax perspective. You should be able to deduct the interest you're paying but you will also need to declare the interest income you're receiving. There's obviously a number of commercial issues that would need to be considered - e.g. credit risk of the borrower.
     
  7. Blueskies

    Blueskies Well-Known Member

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    I dont really undertand how this would work in principle. A few issues i could see are:

    -Who would pay you 10% yield to borrow cash and at that rate is there a risk of losing your capital
    - Are you controlling the other entity? And is the dominant purpose to minimise tax, if so it sounds like a pretty blatant scheme
    - you would need to pay tax on the 10% interest received which defeats the purpose
    -if you already have cash in the loan available to lend, you don't gave non-deductable debt anyway?
    -
     
  8. Mitchell

    Mitchell Active Member

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    Would it still be viewed as a scheme if the dominant purpose would be to provide a business funds to allow it to trade/operate?

    For example:
    1. PPOR Loan with separate split of $X fully paid down.
    2. $X is then redrawn and loaned to a start up Pty Ltd company to enable it to purchase products for on-sale.
      • Assume the lender of the funds is also the sole director & shareholder of the Pty Ltd entity
    3. Pty Ltd entity sells products and pays back loan principal & interest per loan agreement
     
  9. tobe

    tobe Well-Known Member

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    I started a business last year. I lent the business money I borrowed in my personal name at home loan rates.
    My understanding is I can claim Te interest on this loan in my personal tax return.
    The business is using the money to generate a profit. Most of which is used paying me a wage.
    That was the plan anyway. It'll be interesting to see once I lodge the tax returns shortly.
     
  10. Mitchell

    Mitchell Active Member

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    Are you operating your business as a sole trader or have you set up a company?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Nope.

    If by busimess you mean a cpany them you could claim the onterest in ypur tax return if there is a commerical loan agreement in place. But any interest you get from the company would be income.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Spouses can lend to each other and interest charged and claimed. And the ato jas accept3d tjis for at least 1 private ruling.

    Bit you should seek legal and tax advice as.many issues and you need consider the possibility of Part ova being applied
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You cant lend to yourself which is what would happen if it was a sole trader
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would depend on the terms.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Example

    Spouse A owns property solely. This is sold and $200k cash left.perhaps during the financial year with no other income such as the birth of a child.

    Spouse A lends to spouse B on commercial terms with the agreement in writting. B uses $200k as deposit on a $1mil investment property.

    B could claim the interest and possibly save about half in tax. A may not be working so may not pay any tax.

    A rate of 10% might be considered commerical for an unsecured loan. If this were the cash the family could be $10k better off per year approx.

    Dont try this at home as risky
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Search for 'related party loans' or 'spousal loans' as i have mentioned it several times
     
  17. tobe

    tobe Well-Known Member

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    Yep company and yep interest I receive personally from the money lent to the company would be declared in the personal return. The interest I personally pay on those funds to the bank wouldn't be deductible otherwise.
     
  18. tobe

    tobe Well-Known Member

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    how would you suggest structuring seed capital to a business @Terry_w ?
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Just lend to the company on commercial terms. If company fails you may be able to claim a capital loss. Have a written loan agreement and consider taking security such as a personal property security act charge over the companys assets.

    Choose who should lwnd the money too.
     
  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The the business would have deductible interest and the lender would have an assessable amount. If the purpose appears to have a character of a scheme. ie a zero income taxpayer (spouse) lends cash to a company which has PSI type income it could be construed as a scheme or a legit loan. When the predominnat purpose is to provide the business with low cost liquidity then I would not normally see Part IVA applying unless there is a scheme for a tax benefit.
     
    Last edited: 8th Aug, 2016
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