Join Australia's most dynamic and respected property investment community

Pay a wage to your business through borrowed money?

Discussion in 'Property Finance' started by JKWS, 23rd Aug, 2016.

  1. JKWS

    JKWS Well-Known Member

    Joined:
    25th Jul, 2015
    Posts:
    66
    Location:
    Australia
    Hey PC gang,

    Ive been asking around and still haven't found the right answers/ answers

    If possible can someone in the know please shed some light? It would be really appreciated.

    Basically next year my equity base and debt ratio is going to be slightly cash flow positive with my current portfolio. Further to this I've also gained a partner who is willing to use their income and name on my new loans, all this in turn should make borrowing small sums under $500,000 pretty easy for us.

    Im a builder, so using this borrowed money Id like to essentially employ myself to complete the works on our new developments/ alterations and additions. All projects on completion provide decent equity and allow for cash flow positive properties.

    Id like to move from one project to the next as the builder and developer, will the lenders allow you to do this if all goes to plan?

    To me this seems feasible, has anyone done something similar- or can share some experiences.

    Thanks
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,557
    Location:
    Sydney or NSW or Australia
    Do you have a company? ie a separate entity (not a partnership or sole trader).
     
  3. JKWS

    JKWS Well-Known Member

    Joined:
    25th Jul, 2015
    Posts:
    66
    Location:
    Australia
    No, but more than willing to setup the right structure to suit the setup. Do you think this is the direction we will need?
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,557
    Location:
    Sydney or NSW or Australia
    A couple of different options:
    • set up a pty ltd company and become an employee of this company (possibly single director) - this creates a new entity which can employ you to do work; or
    • have your partner purchase in their name (you may or may not need to be on the loan),you can then be paid for the work you do on the property as you do not own it (legal/accounting brain needed to sanity check this one - @Terry_w @thatbum or @Paul@PFI/ @Greyghost )
     
    Cadbury99 likes this.
  5. JKWS

    JKWS Well-Known Member

    Joined:
    25th Jul, 2015
    Posts:
    66
    Location:
    Australia
    And just like that I have some great advice!! Thank you.

    I wonder, if we as a couple borrow the money (so both our names are on the title deed) and employ myself as a pty ltd to complete the works- they will allow?
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,557
    Location:
    Sydney or NSW or Australia
    Yes, a pty ltd is a different entity to Mr & Mrs. Check out @Terry_w tips about the effects of having both names on the title
     
    JKWS likes this.
  7. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    452
    Location:
    Adelaide, SA
    Speak to banker/broker regarding borrowing for the developments. Banks aren't too fond of owner builders. Do you have sufficient equity outside of the developments, would you continue to have income outside of the development and what's your history is the field?
     
  8. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

    Joined:
    9th Jul, 2015
    Posts:
    1,078
    Location:
    Perth
    You would need 2 years profitable trading for income to be accepted by a bank.

    Is it feasible to live in the property as your PPOR and then sell CGT free and derive a capital base.

    Can you increase current borrowings from existing properties?

    I doubt you can pay yourself a wage from borrowed funds bit there may be some creative structures to facilitate something similar?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,973
    Location:
    Sydney
    You cannot contract with yourself but you can contract with a spouse or related entity even if you are the sole shareholder and director of a company.

    Depending on what you want to do it may work out better to plan ahead for the next 5 or so properties and determine who will be the owner and how it would be funded.

    If yo intend to keep it may be good to get one in the spouses name. Keep it simple. Your company as the builder can contract with the spouse and she can borrow to fund it.

    Depending what state you are in the next one may be in a trust which is controlled by the spouse.

    Your spouse may be able to borrow normally for these. There is less chance that these will be taxed as income and she may get the cg discount.

    An entity that you control is more likely to be taxed as income and it will be harder to get finance if you are both owner and the builder.
     
    Perthguy and sanj like this.
  10. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Perth
    Doesnt really sound like a business if its just being set up to justify wages to work on a related party property/s but if that issue is clarified and the OP does have a legit building business he could personally borrow the money and pay this business for its services.

    Alternatively, could personally borrow or gift the money to his business which could then be paid to undertake the project.

    A fair few things to navigate and ensure it doesnt end up being nothing but a scheme but i wouldnt completely rule it out until fully investigated.

    A lot of what ifs though. Im surprised you dont have a company set up for your current building projecrs @JKWS , or have i misread that?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,973
    Location:
    Sydney
    You can't pay yourself a wage - but a company can pay you a wage and it could borrow money to do so. But you have to think about the tax and other consequences. Company may be running at a loss and you the individual be taxed. So overall no tax savings, but actually paying more tax for this financial year.
     
    Perthguy likes this.
  12. JKWS

    JKWS Well-Known Member

    Joined:
    25th Jul, 2015
    Posts:
    66
    Location:
    Australia
    I do own and operate a company for my building works, we've been operational for 4 years. Ideally id like to keep it moving along with own projects- However the goal is to focus on own projects from next year onwards.

    We plan to develop and hold, id like to draw a wage in some way to survive- Hopefully we can find a structure that allows this.

    Sounds like we will have to sell one every now and again for cash flow?
    or
    Find a lender that understands what it is we are doing? Private lenders might have to be an option.. These guys want you tell sell anyway to claim a quick return though..

    @Terry_w- we might get in touch soon for a consultation, sounds like there is a way.
     
    Perthguy and sanj like this.
  13. JKWS

    JKWS Well-Known Member

    Joined:
    25th Jul, 2015
    Posts:
    66
    Location:
    Australia
    Thanks everyone.
     
  14. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Perth
    Ah ok i see now.

    In that case id definitely consider buying the property in whatever entity is deemed appropriate and then contracting your company to do the work.
     
    JKWS likes this.