Loaning money / Investing from company

Dot points for clarity. Figures chosen for ease of calculations

Loaning $1 million to a third party.
Getting a lump sum payment in 2 years of 50% return, so profit $500k in 2 years. There wouldn't be any monthly interest payments - so not sure if this is still a loan div7? or simply company lending out money to third party.
Will be a personal loan to an individual - yes, high risk, yes, might lose it all.
No, the figure isn't $1 million.

• Have a trust
• Have a bucket company (no money in there atm, but can pay dividends to it, would mean we would need to pay the 2.5% difference between 30% bucket company tax and 27.5% company tax)
• Have trading companies where we run businesses - low risk.
• Have capital in companies and individual names, trust I don't believe can hold any money as any money in there belongs to individual anyway I believe, unless we allocated some to bucket company of which we have not.

What is the best way to lend this money out?

• Easiest way would be to just lend capital from our trading companies to the third party downside would be risk if something goes wrong with the trading companies. Any profits would stay in the trading companies and we can just distribute from there.
• Transfer dividends to the bucket company and loan out from there, means we would need to pay 2.5% extra. Safe, little bit of a hassle. - Not sure if bucket company can do this?
  • Should we just setup a new bucket company?
  • Should we just setup a brand new investment company?
    • Costs of new company
    • Would not be able to offset losses if that did occur. e.g. lose it all.
• Setup a brand new company as above and lend out from there.
  • We aren't investing in something high risk as it is purely a loan to the other person so we don't have any liability in the end investment. It's essentially a high interest loan as the third party is short on capital.

 

Take some legal advice. Think of that fact that you might have to sue the borrower at some point and also if it succeeds the taxation on the income.
Its just not as simple as a two word answer.

 

This is wrong.

 

Who owns the shares in the bucket company?

who owns the shares in the trading company?

you dont ‘transfer dividends’.

 

Is it a loan or an investment ? They way you describe it sounds like you are investing $X and getting a ROI. There could be a range of tax issues. eg If you lend $X to someone and in 2 years get back $Y then $y-$x is considered interest and for a money lending transaction this is not necessaily taxed on receipt. I would assume you may account for the liability for unpaid interest ? (This may occur through informal records and need not be reflected in double enrty accounting records). Then accrual accounting is being used and may need to be bought to account as it is earned, rather than received. The capitalisation of interest can further trigger that constructive receipt concern. This is a typical key element of many schemes that the Commissioner attacks. It need not be a scheme but indicates some concerns about the arrangement. There could even be a partnership here eg Company as lender and Mr X invest and undertaken a dev. Company describes it as a loan. The entity receiving funds doesnt account for it as income. It expects to share profits. Could be partnership income ? Entity identification ?

All this also affects legal position eg can a loss be claimed if it occurs ? Is it a bad debt ? Money lending ?


You said : We aren't investing in something high risk
- We - As in an associate ? Division 7A ?
- Is it a loan or not ?