Tax Tip 395: LVR When Borrowing from a Related Company under a Secured Loan

In the last tax tip

Tax Tip 394: 25 Year Secured Loans from related Companies

Tax Tip 394: 25 Year Secured Loans from related Companies

I mentioned that it is possible to borrow from a related company and the loan can be up to 25 years if it is secured by a registered mortgage.

This much is true.

But that doesn’t mean the company can lend 100% of the purchase price of the property.


Section 109N ITAA36 restricts the LVR with the following subsection:

(3) The maximum term is:

(a) 25 years for a loan if:

(i) 100% of the value of the loan is secured by a mortgage over real property that has been registered in accordance with a law of a State or Territory; and

(ii) when the loan is first made, the market value of that real property (less the amounts of any other liabilities secured over that property in priority to the loan) is at least 110% of the amount of the loan; and

(b) 7 years for any other loan.


What this means, in common language, is that the loan must be less than 90.909% LVR at the beginning of the loan.

If it was a $100,000 property $90,909 in borrowings would make the value of the property at least 110% of the loan.

 

I wonder who determined that % ? Its akin to GST being 1/11th (9.09%) so perhaps its like a commercial lending issue where the GST cant be borrowed ?

There was a possible plan to change all these rules too. The unsecured and secured term proposed to both become 10 years which would have a major impact on repayment mins and all loans would need P&I repayments annually. I wonder if this is a policy the ALP will pursue ? I dont imagine they would oppose it.

Targeted amendments to Division 7A