Tax Tip 396: Borrowing from a Related Company and Second Mortgages

In my last 2 tax tips

Tax Tip 394: 25 Year Secured Loans from related Companies Tax Tip 394: 25 Year Secured Loans from related Companies

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

I have been discussing borrowing money from a related company and securing this loan against real property.


I should point out that the legislation only talks about registered mortgages with there being no restrictions on the company being the first registered mortgagee. This means second, or subsequent, mortgages are able to secure loans by a company to a related person who has equity in a property. But the LVR restrictions still apply (see tax tip 395)


Example

Homer is director of Homer Industries Pty Ltd which is a company that makes artificial legs. They have been run off their feet lately and the company has $1mil profit. It pays $250,000 tax and has $750,000 left over.

Homer wants to pay a large personal expense this year but doesn’t want to receive too much income from the company as he will be paying too much tax.

He has a home loan of $200,000 on an $800,000 property so using the formula in s109N ITAA97 he works out if he borrows up to about $520,000 from the company under a secured loan with a registered mortgage, he will still potentially be within the Div7A rules.

The mortgage would need to be registered on title and will come in behind the bank in priority.