Maximising borrowing via company/trust.

Hey Team,


Recently my partner and I created a new business structure to run the business through.

I was previously working under a different structure, though have begun unwinding it as JV wasn’t working out.

I am looking at the best way to maximise borrowing capacity in 12-24 months.

Thoughts on the matter:

1. Partner and I are both directors/appointees of the company/trust, in equal partnership.

2. Plan was to consistently (weekly/monthly) distribute a majority of the profit to her, so in 12/24 months, if, and when she decides to leave work, she will be able to borrow substantial funds.

3. I’m not fussed about the amount of tax to be paid, my plan is to place running costs against the business, and distribute profits to maximize borrowings under partners name.

4. I don’t see the benefit in distributing to myself at this point as I am already maxed out with my borrowing capacity.

Question:

1. Do I need to distribute funds to a person, can I pay a business, and have the business borrow money directly?

2. If the above is a no, as she is a director of the business, will this impact how the distributed funds will be assessed by the bank at the time of borrowing? Eg. Only count 70% of income.

3. How can we utilise the distributed funds to grow the business once it is paid out to her?

This will all be surplus cash, as our jobs comfortably pay for all our expenses and more. Can we funnel different funds back into the business, or do I disperse to her, and pay into the business myself using my income?

Hope that’s clear.

If not, please let me know.

Any advice would be greatly appreciated as to how best maximise borrowing through the trust structure.


Regards

NHG.

 

Hi NHG


It sounds like you don’t understand the basics and/or you are confused.

Generally, a company operating a business should have just 1 director to reduce risk.

If you are both directors of a company this is not a partnership, same if you are both appointors of a trust.

You are equating distributions of profits with serviceability. This is not necessarily how it works. The lenders will look at the overall position including incomes of related companies and trusts.

1. It sounds like a company is acting as trustee. So 'you' don’t distribute the profits but the trustee will distribute the income. A business is not an entity but something an entity does. Not sure what you mean by “can I pay a business”. A company or person can borrow money or receive a gift, a business cannot.

2. She might be a director of the trustee company operating a business. If so and if she is a beneficiary of the trust and the bank will take that into account. How much of the income she gets for serviceability purposes will depend on how it is all structured.

3. We? You could ask your girlfriend to lend or gift money back to the company which is operating the business.

It sounds like you haven’t received any legal advice = which would probably something you should do before it too long as the longer you leave it the harder it can get to fix the mistakes.


See my post of trusts and serviceability.

Trust Strategies to Increase Borrowing Capacity
Trust Strategies to Increase Borrowing Capacity



And, there is a supremely better way to structure all of this to quickly improve serviceability.

 

Another different question occurs to me on the issue of trusts and (maximising) servicability. If you gift money to a trust to buy shares, on what basis will a bank generally include income (dividends) you receive from the trust when you apply for a loan (in your personal name)?

I assume you need to:

1) Be the trustee with absolute discretion over distributions, AND

2) Have a history of 2 years of (stable) distributions from the trust to you personally as the beneficiary.

 

Amazing. Thanks.

I meant company, not business.
I associate them both in my mind, though I get they are completely different.

Something to retrain myself on.
Will read over and see if I can clarify.

 

1. Not necessarily need to be the trustee.
If the income is going to a corporate beneficiary or bucket company the lenders can still take that income into account for serviceability. But generally 2 years of history needed for dividends.

 

If the trust income is business income there could be tax laws that impact the capacity of the trust to distribute to the lower income partner. eg If the income is personal services income it may be required to be allocated to the person who produces the income. A trust doesnt bypass this issue just because the deed permits a distribution. There may be no net trust income to distribute.

eg Fred is married to Mary. Fred is a consulting geologist and largely performs 90% of his contract work for a single mining company at various mines across Australia. This income is produced by Fred and comes from his personal services. The trust may be required to allocate the personal services income to Fred prior to determining what the net trust income is.

 

Thanks Paul. I was thinking about a case of the trust holding passive assets (shares), and distributing the income (dividends) to beneficiaries. In that case, I assume there is no obvious restrictions beyond those in the trust deed.

 

I posted re NHGs comments.

Investment income is a far simpler issue. But unless we are talking substantial income it may be a costly exercise.

 

Informative. Thanks.

The business is unrelated to both our PayG's and degrees.
Partner is looking to leave work in about 12 months.
I'd like to disburse what is required for about $1.5M borrowing as I see great opportunities in Sydney in the next 12-18 months.
Gauging from what my mate has managed to obtain, I imagine around $120-140k/yr is required.
I will be looking to send this to her as a 'salary' week-on-week.
She is very much actively involved in the business.

Just trying to make sure I have all the boxes ticked.
I'm getting further professional advice, I just want to make sure I have a clearer idea before the meeting.