I asked in the finance thread if you could release equity to buy machinery for your business in which the feedback indicates you can. It did get me thinking though about how this would look from an accounting stand point. The house being one entity and the business another. I imagine this is fairly common practice and not always just to do with machinery, could be any money the business needs I imagine. So my question is how is this commonly structured? Would you release the equity under your personal name in which the house is owned and then loan that money to the business under commercial terms? So in essence the business then owes you the money back.
From what I've gathered from Terry's tips yes. But you have to pay personal tax on the amount of interest you earn from the company unless you have it set up as just principal repayments to you personally. Either way your paying tax or interest if you draw it out of equity. Terry will probably be here any minute to explain it better or right
I think you should always loan equity rather than gift it. But it is often best if the loan comes from your separate entity that provides these loans for your business, your property investments etc and then these are secured via a charge, mortgage etc. The loans need to be documented and secured. An undocumented loan can be fatal to your business, even when it is the one that has borrowed. If your business entity is trading well and separate from you (as it should be) and you personally get into trouble and the loan is not documented then your bankruptcy trustee can send your business a letter of demand stating the loan is now due and payable. If the business entity doesn't have the liquidity to pay that back straight away it is an issue. On the other hand if the loan was documented, on normal commercial terms etc then the bankruptcy trustee could only direct that the payments required under the loan (whether they be interest only or p&I) are to be redirected to them.
+1 Documented loans with security may allow the Director to rank ahead of unsecured creditors. ie Security Register formalities are worth the effort.
Thanks RPI and Paul So I imagine by doing this the business can also claim the interest charged. You could then of course not claim the interest on the original equity release, or else that would be double dipping and Im sure the ATO would not be too keen on that.
Don't forget a business is not a legal person but something a legal person does. Usually the business will be operated by a company. So you could lend to the company which could use the money to invest in equipment. This loan could be at 0% interest or could be on market terms. Either way it should be a legally enfforceable contract. Many think 'no problem' because the company is controlled by theselves. But if things go bad it would be a liquidator that takes over and it is at this point you want a legally enforceable contract. this is when using a separate entity to lend is good - imagine you had to sue the company which is now under the control of the liquidator - you would potentially go to court and potentially lose. So having an interposed company as trustee lend to the business company would be good. If not then choose spouse A or spouse B, but not both so only one is at risk. If you are borrowing then onlending you would need to charge at least the interest rate you are being charged and probably more to make sure you the lender can claim the interest. You cannot lend equity either but only money. Or cross collateralise - not a good idea
And for any loan security should be considered. For land a mortgage and for non land a charge under the Personal Property Security Act. Failure to register a charge or mortgage will mean you are an unsecured creditor and someone else could get in and gain priority.
