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Taxation issues with lending company money

Discussion in 'Accounting & Tax' started by MBowen, 27th Jan, 2016.

  1. MBowen

    MBowen Active Member

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    Does anyone know if I personally lend my husband and I's pty ltd company money that than gets used to buy an investment property or a deposit for an IP. If I charge the company say 3% interest can this be claimed as a deduction? Obviously I will have to pay tax on the interest from the company. Just trying to get my head around it all.
     
  2. Greyghost

    Greyghost Well-Known Member

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    Individually if you lend to the pty ltd and get a basic loan agreement in place so the pty ltd can claim a deduction at 30%, you will in turn generate income (interest) for you to pay tax on at your marginal rate, which may be higher than 30%.
    If the money came from personal loaned funds then you can claim a deduction to offset your income received and thus the end deduction rests with the pty ltd.

    On a side note be careful of buying a property in a pty ltd. no cgt 50% discount. (There are a couple of exceptions as to why you would buy in this structure but generally not).
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are a number of tax issues here. Is the money your money and not your spouse's, i.e. the source? If so and if there is a written commercial loan agreement then the interest on the loan could be deductible to your spouse if they use the money to invest.

    Same with the company.

    But if the money is borrowed then on lent then the interest won't be deductible if you are lending for less than you are borrowing.

    Any interest you charge will be income to you.

    Don't forget other aspects such as
    - security
    - asset protection
    - death
    - limitations act
    etc

    I have written about related party loans in my legal and tax tips.
     
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  4. Scott No Mates

    Scott No Mates Well-Known Member

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    Which can be less than the tax you'd pay if you flipped it within a year.

    And marginally more than if you're paying 45 cents + 2% medicare levy (& 2% budget repair levy)
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Companies can help you save the 1.6% annual land tax bill in NSW too.
     
  6. MBowen

    MBowen Active Member

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    Thanks for your replies everyone. Greatly appreciated.

    Ok so it'll be funds from both my husband and i's refinance from a personal property in our names. So if we draw out $200k at the 4.63% rate and have the company pay us back the same rate that will be fine from a tax standpoint. We just can't have a lower rate? Also can we determine how much principal the company can pay back in one of these commercial loan agreements? Thanks Terry i'll look them up now.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    So you will be borrowing and onlending. You will be giving the bank security for its loan - a first registered mortgage probably. Will you be taking security from the company for your loan? If not then your loan may not be on commercial terms. I don't think this is a major issue but best to seek tax advice.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Is there a tax benefit in the chain ?
    What is the reason for using the company (ie offset losses etc)
    all can give rise to Part IVA concerns later
     
  9. MBowen

    MBowen Active Member

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    The main reason was to avoid land tax and to have a bit of security if we were to be sued personally. Our businesses are doing quite well just don't want to pay land tax. What is part IVA?

    Hi Terry the plan was to not have security from the company.
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Asset protection in a company may not be all it represents. So you own shares in a company. Lets say they are worth $1 now and then after buy property etc and it goes up in value each $1 share is worth far more based on company net assets. You own them. You have substituted land for shares ? Still an asset. A trustee in bankruptcy may query the company and your investment. .... and your capacity to be a Director. Could even find the loan was a sham and demand it be repaid. Again its your asset...now that of your trustee in bankruptcy. ...

    Part IVA is the general income tax anti-avoidance rule. If a arrangement is a scheme that provides a tax benefit it may be cancelled by ATO. Possible there is no such concern

    I wouldn't be racing into a company for land tax alone.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you own shares of a company and you become bankrupt those shares will fall into the hands of creditors. So the creditors now have the rights that you had as shareholder. If you were majority shareholder they would remove you as director (you cannot be a director while bankruptcy anyway) and appoint someone else who would then cause the assets of the company to be sold and dividends paid to shareholders = no asset protection.
     
  12. myotherac

    myotherac Member

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    I will also be asking my accountant this question but thought I might check here. From my reading of the NSW OSR website, is there a limit of the land tax threshold to only one company that you own or control, due to grouping provisions?
    Related Companies | Office of State Revenue

    Does this mean you can't set up another company to get another land tax threshold?

    Grouping doesn't apply to SMSF funds. You can set up a new SMSF fund and get a new land tax threshold for each new fund.
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is a lawyer question because it is a state tax.
    It is not as simple as you setting up a new company, but you may be able to stretch it a bit by not having a controlling interest in the second company - a spouse maybe. After that you have to get more creative.

    See LAND TAX MANAGEMENT ACT 1956 - SECT 29 Related companies
     
  14. myotherac

    myotherac Member

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    Thanks @Terry_w

    With all due respect, my accountant knows far more about taxation issues than my lawyer. My lawyer is a nice guy and I have faith that his intentions are to look after my legal interests but he has given me some questionable advice. I bought a property on Nov 21 that had a 6 weeks settlement time (bringing it to 4th Jan) on the contract. He suggested we settle before the new year as banks and lawyers shut down. Obviously I said no, as I would have to pay an extra years worth of land tax based on holding the property on Dec 31! [I'm in NSW].

    Although I have no accounting or law background, it is best that I learn and know as much as I can. No one can look after your interests better than yourself.

    I would be maxing out my company land tax threshold at 1, as my wife and I are directors on all our companies. Having 2 directors is disadvantageous in this regard, and also for servicing calculations but does have advantages as it would avoid the issues that arise during the death of a sole director.

    Accountants also didn't give me the best structure. My bucket company that receives discretionary trust distributions has myself and my wife as shareholders [not ideal as lacks flexibility and income splitting to other family members potential]. After reading your tips, I have set up a new bucket company with a discretionary trust (corporate trustee) as shareholder. I will be drawing on the 1st bucket company's funds and winding it down and putting all new distributions to the 2nd company.

    I haven't got a will yet. That is something I know I should do but have been postponing. Do you set up wills @Terry_w ?
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Most people don't realise, even lawyers don't, but tax agents are only authorised to give tax advise in relation to taxes administered by the Commissioner of Taxation. This doesn't cover state taxes such as land tax and stamp duty.

    Having 2 directors of company A would probably prevent company B getting a threshold in NSW.

    I do set up wills and did my masters of law in wills and estates.
     
  16. myotherac

    myotherac Member

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    I should come and see you to set up our will when you are taking new clients. It might be a bit complex. At the moment, I control (director or trustee) over 20 different entities (trading companies, bucket companies, 2 x SMSF, 2 x family trusts).
     
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  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Your accountant's bill must be large!
     
  18. myotherac

    myotherac Member

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    Yes, it is substantial.
     
  19. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The wording used in the Legal Practitioners Act in each state varies but does refer to "legal practice" other than SA which refers to "practice the profession of the laws" (with defined examples). Legal advice is not prohibited as such unless it satisfies the tests of being given as part of legal practice.

    Numerous cases have been handed down on this conflicting issue and all cases refer to the quandary that
    1. Some lawyers have no skill or interest in giving legal advice about tax laws and yet the Law Society has no specialist designation.
    2. Some accountants have no skill or interest in matters relating to tax laws in discharging their role eg a company accountant. Accounting bodies do not have a specialist designation but members may be registered with the TPB.
    3. An accountant may rely on legal advice given by a solicitor but who is not a member of the Tax Practitioners Board leaving the accountant exposed to liability for the tax consequences of the advice in many instances.
    4. PI insurance definitions are conflicted and often reflect the same problem as above

    A more workable proposal that has yet to be determined is that tax practitioners (not accountants) should be afforded a limited safe harbour where they hold and maintain professional development that supports them giving limited legal advice about the operation of taxation laws.
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Its a minefield at the moment. I think now all the states have uniformed their legal professional acts (from july last year) so there is some movement in the right direction. Most lawyers have no interest or knowledge of land tax so it should be something that a tax agent can advise on, and most probably do, but they should agent the tax agents act to make it lawful.