business – developer – reducing non deductible debt

Question

Next year the profit our business (pty Ltd) will make will probably be $1000000 before tax (30%). All business loan balances will be Nil. Is there anyway using PBR79002 (or other) to transfer this money (**before tax**) to my personal home loan of $300000 (LOC) without having to declare the income on my private tax return.

Answer

Thank you for that PBR reference always interested in private rulings on this issue as it Is ridiculous how the ATO tries to treat businesses and share market investors differently to property investors.
As you probably already realise your problem is that you are operating as a company and that ruling is about a sole trader. The sole trader would have still had to pay tax on the businesses profit, the trick was that he or she turned non deductible debt into deductible debt so increased his or her deductions, reducing his or her future tax.
In your situation come 30th June next year someone it going to have to declare that profit as income. The company could and pay 30% tax or you could take it in wages and pay the tax in your name. There is also the option of a possible lower tax rate by paying some of it into a superannuation fund but that will probably interfere with you using it for other purposes, if you are under 55 years of age.
Tax on the profit is unavoidable it is just a question of who will pay it. If the company pays it then the remaining $700,000 still belongs to the company. It can pay it to you as a franked dividend then you put $1,000,000 in your tax return pay your marginal tax rate (most of it will be 47%), deducting a franking credit of $300,000 or it can lend it to you but you have to pay interest probably at a higher rate than you are paying on your home loan. This is not really a good outcome I assume the interest on your home loan is not tax deductible.
Consider having the company pay the tax and slowly distribute the $300,000 you need out to you so that it doesn’t push you into a high tax bracket all in one year. In the meantime you could borrow the balance from your company put it into a redraw or offset account on your home loan but you must pay it back before the company lodges its tax return for the year you borrowed the money. This will at least get you into another financial year where you can take another dividend. But you won’t be able to borrow the balance a second time and get away without paying interest. Even with the first loan I suggest you put a loan agreement in place so that you have the backup of at least only having to pay interest should something go wrong. You see if you take the money and don’t enter into a loan agreement and the balance is still outstanding after the tax return is lodged then you are considered to have received the whole amount as a dividend.
The reason you can only borrow it interest free once is that legislation prevents you paying the loan back on the day of lodgement of the tax return then just borrowing it back again, effectively giving you the use of the money 364 days of the year without paying the company interest. Here is a link to section 109R which is intended to prevent you borrowing money, repaying it each lodgement date and borrowing it again. http://law.ato.gov.au/atolaw/view.htm?docid=PAC/19360027/109R the relevant section being:
109R(2) [Intention to obtain loan] View history reference


A payment must not be taken into account if:

(a) a reasonable person would conclude (having regard to all the circumstances) that, when the payment was made, the entity intended to obtain a loan or loans from the private company of a total amount similar to, or larger than, the payment; or

(b) both of the following subparagraphs apply:

(i) the entity obtained, before the payment was made, a loan or loans from the private company of a total amount similar to, or larger than, the amount of the payment;

(ii) a reasonable person would conclude (having regard to all the circumstances) that the entity obtained the loan or loans in order to make the payment.

So maybe you could do it for a year. Nevertheless tax will still have to be paid on the money by the company so, at best you are saving 17% tax (30% co tax 47% maximum tax rate) to take the money gradually. It may be better to just take the $300,000 you need this year, partly as income partly as a loan pay it all off the mortgage and the next year pay yourself a franked dividend to get rid of the loan. Better to pay a little to the tax man and stop paying non deductible interest to the bank.
Please make sure you discuss this with your accountant, who has a full understanding of your affairs first but I can assure you there is no way of avoiding the tax on the profit, it is just a question of whether you or the company pay the tax. If it is the company then your access to the money is extremely limited.

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