Loan to my company - which way to go?

I have set up a new Pty Ltd company and am looking to loan the company funds to allow it to purchase stock for resale.

The two options I'm considering are:

1. Loan funds with no interest payable to the company from my savings (which is an offset account linked to my PPOR home loan);

• Assuming I loan $100k, this will mean the interest I incur on my PPOR home loan will increase by $4,000pa (interest rate @ 4%).

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OR

2. Create a new $100k split on my PPOR home loan, transfer the $100k into the split and then redraw the funds to the company as a new loan. The company would be charged interest at the same rate as being incurred on the home loan being 4%.

• The company would pay me $4k interest over a year & I would claim the $4k interest incurred on the loan split
• Company would deduct the interest reducing the taxable income

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Assuming the company makes a $40k gross profit and pays tax at the 27.5% option 1 would see the tax bill at $11k.
For option 2, the tax would be slightly less at $9,900 as the loan interest would be deductible.

Am I right in my thinking or am I completely off track or missing something?

 

Seems correct to me.

 

Yeah I would go the second option.
But is it an arm's length agreement if the bank has a first mortgage over real property and you have no security for your loan?

 

Is it ever an arms length agreement if an individual is loaning to a company they are sole director/shareholder of?
Can you elaborate on what implications this could have if it's determined it's not an arms length agreement?

 

Or c) issue 100000 x $1 shares.

You have purchased an investment (shares), probably get dividends and have a legit loan for investment purposes.

 

Or issue redeemable pref shares at 5%

 

Unless there is a scheme benefit I have never seen the ATO attack a related party loan .
especially where there is a onlending of personal loan proceeds TO the company that it uses for income producing purposes

 

Yes a related party loan can still be at arm's length.

Deductibility of interest is on issue - you are essentially diverting income to the company where it could be taxed at a lower rate.

But I have never seen the ATO concerned with this and have drafted many agreements where the rate was the same. But some accountants like their clients to charge a bit more than the bank charges them so that they can justify it as being more of an arm's length transaction.

 

If your company turnover exceeds $20m you will need to document the loan with a term not exceeding 10 years.

Otherwise their is a risk that the loan will be viewed as shares and treated the same.

Option 2.

 

Yes Ross often overlooked.