Tax Tip 365: Borrow from Company, Repay on 30 June and Reborrow 1 July?

Discussion in 'Accounting & Tax' started by Terry_w, 29th Jul, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Div7A will deem loans from companies, related to shareholders, to be taxed as unfranked dividends unless a Division 7A loan agreement is in place.

    What some used to do, and some still unknowingly do, is to take money from an associated company and then pay it back just before the end of the financial year, before reborrowing it again just after the new financial year.


    Example

    Homer runs Homero Pty Ltd which has retained earnings of $500,000. Homer is on the top marginal tax rate plus has a HECS debt so he leaves the money in the company rather than take it out.

    But Homer also has $500,000 owing on his main residence.

    Homer’s suburban accountant tells Homer he can take this $500,000 from his company bank account and put it in his offset account on his home loan and if he does this on 1 July and repays it on 30 of June he could continue doing it year after year without triggering Div7A.

    Homer does this and pays no interest on his home loan.

    He tells a mate about this super duper strategy and his mate says that there is an anti-avoidance provision in Div7A designed to prevent this from happening.



    Homer has a look and after 6 hours he finds he relevant subsection which is ss2 of section 109R of ITAA36

    http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s109r.html



    s 109R(2) basically says that if a loan paid from a company is repaid only to be lent out again then its as if the repayment didn’t occur.


    This would mean Homer is taxed on $500,000 as an unfranked dividend.
     
    Last edited: 3rd Aug, 2021
  2. craigc

    craigc Well-Known Member

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    Should this be 30th June @Terry_w?

    Also I see ‘retired lawyer’ in your sig. I hope you’ll be staying around the forum with your valuable tips!
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, 30th of June. thanks Craig
     
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  4. Whiteman

    Whiteman Well-Known Member

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    Hi Terry

    If in the example of Homer you give above, If the money was deposited to an offset for a 100% rental property with no personal use at all would that change the situation at all?

    In that instance the money is being taken from say earning .1% interest in the business account to then earning an additional $15,000 in interest savings if the funds are offsetting a 3% interest rate. Win for the individual tax payer concerned and win for the ATO (extra tax revenue).

    Thanks
     
  5. Mike A

    Mike A Well-Known Member

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    if it was taken from the company and deposited into an offset account attached to a rental property in the name of a shareholder or associate it would be subject to div 7a.
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    how is it a win for the company?
     
  7. Whiteman

    Whiteman Well-Known Member

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    The first response that comes to my mind was, who gives a $%&^? In my eyes, the company only exists to better my life and lifestyle, but as you are asking, that is clearly not the right answer. Based on your answer as a company director I must act in the best interests of the company, not myself as MD and sole shareholder.

    Thank you for answering and thank you for all your posts and the time and knowledge you put into this community. So informative and truly appreciated.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It doesn't matter for Division 7A purposes if the company benefits or not, but consider the corporations law aspects as well.

    For Div7A all that matters is that a shareholder or their associate is obtaining a benefit and the loan could be taxed as an unfranked dividend if it doesn't meet the requirements.

    Imagine Homer being taxed on $500,000 being added to his taxable income.
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes the potential tax rate then becomes 30% (Co) PLUS 47% (personal) = 77% with penaties also potentially applying to Homer. Could also mean franking benefits arent available even if they could have applied.
     
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  10. Mike A

    Mike A Well-Known Member

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    if tax planning is being done and client communication channels open these issues can be adequately addressed at the time.
     
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  11. lixas4

    lixas4 Well-Known Member

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    Is there a way to make this strategy work?
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A properly formulated Div 7A written loan agreement and each years loan is kept distinct and thereafter maintained possibly with a annual franked dividend to assist to repay the loan. The merits of this need tax advice of course. Div7a strategies tend to defer a taxing issue.
     
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  13. Mike A

    Mike A Well-Known Member

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    yes it needs to comply with div7a. loan documentation. minimum loan repayments.

    their is a strategy to spread it out over 25 years but requires a mortgage over the asset. might not be obtainable.

    but 7 years is the norm
     
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  14. Lin Holker

    Lin Holker New Member

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    Hi

    This seems like a relevant post to add to - albeit a post 7 years ago!

    I've been looking at ways to utilise profit in order to reduce company tax

    The below is a copy and paste from a marketing company on the web.

    Am I reading this correctly? If my company purchases a property and the company loan also has a mortgage offset account, company funds can be moved to the offset account in order to effectively reduce the profit of the company? And consequently reduce the company tax as profit has reduced?

    Just sounds too easy.

    And if correct, can the funds transferred in the offset account consequently be used for other things than just sitting in the offset account?


    "HOW TO RE-INVEST PROFITS TO SAVE TAX AND GROW YOUR BUSINESS IN AUSTRALIA

    If your company has different mortgaged properties, you can sign up for mortgage offset accounts that will allow you to re-invest your profit and to cut the money that you would otherwise spend on paying taxes.

    Using a certain portion of your proceeds to pay for your mortgaged properties will allow you to minimize the interest costs that you need to cover and will enable you to effectively minimize the length of mortgages set on your properties. You will also spare yourself from the hassle of paying taxes on your company’s savings account by shaving off a certain amount from your base line."
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If a company has a loan that was used to buy property then it can generally claim the interest on that loan as an expense. Some bank loans to company borrowers can have offset accounts attached.
    But if money is deposited into the offset account the interest on the loan will reduce.
    This means the company will make more profit from that property as the expenses are lower.
    This will mean more tax is payable.
    Similar if a loan is paid off.
     
  16. Lin Holker

    Lin Holker New Member

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    Thanks so much for the reply Terry

    I understand that offset would reduce interest expenses which would be fine.

    I was more looking at whether the offset account for the loan could be used to deposit company funds so that yearly company profits were reduced.

    And then, can the funds in the offset account be utilised for company or non-company related expenses when needed...rather than just sitting in the offset account.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    no

    This would be like you depositing your wage in your offset account thinking it would reduce your taxable income
     
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