Claiming interest on borrowed funds for business costs?

[Propagate]

Hi all,

I'm in the very early stages of looking to start my own company.

Hypothetical question regarding start uo costs, I have the cash to buy the equipment and software I need ready to go.

I start a company, "Propagate Enterprises" for example and I am the sole owner/director.

If I use my cash to pay off a chunk of the PPOR loan, then take a new loan split and use the loan proceeds, (which would be in mine and my partners personal names), to purchase the equipment I need for my new company, can I claim the interest on that loan split on my personal tax returns at year end or do I have to pay my cash into an account in the new companies name and buy my equipment through the company?

Thanks.

 

[Propertunity]

If I use my cash to pay off a chunk of the PPOR loan, then take a new loan split and use the loan proceeds, (which would be in mine and my partners personal names), to purchase the equipment I need for my new company, can I claim the interest on that loan split on my personal tax returns at year end or do I have to pay my cash into an account in the new companies name and buy my equipment through the company? Thanks.

You should set up the Pty Ltd company and register it for GST. Then you loan (as a director) the company, funds to start with - a Director's Loan. The equipment would then be purchased through the company in the company's name and a GST credit could be claimed on the next BAS.

The mechanics of claiming interest on the loan, I will let the bean counters respond to. But in general terms, the interest would be tax deductible if the money was being used by the company to earn an income. Treat the company as a separate "person".

Cheers,
Alan

 

[Propagate]

Thanks Alan, that makes sense.

Cheers.

 

[Paul@PFI]

The company must have an ABN. The company may voluntarily register for GST or it may be compulsory - You may need basic advice.

The company will employ you. Super etc must be considered and the Co must have a workers comp policy.

If you lend $ to the company its highly likely the funds will not be deductible to the company. You could do something formal and then it would be but you would be assessed on it. ...Deductions for interest require advice.

 

[Propagate]

Thanks Paul.

I'll definitely be taking proper advice when the time comes to make sure everything is set up above board.

Just doing fag-packet sums at this early stage.

Cheers.

 

[Terry_w]

Generally

You could not claim the interest on the loan yourself as you will not be deriving an income from the expenses. The company would be the one deriving the income.

If the company borrows money to buy equipment which it uses to produce income then it could claim the interest. Any interest paid to you would be income to you, but you could offset that by the expense of interest you pay to the bank.

This all depends on the loan agreements being commercial.

And think asset protection too. Holding equipment etc in a trading company will be risky as any dispute in the company with clients etc will expose the assets of the company. So it may be worthwhile setting up another structure to own the assets which could then be leased to the trading company.

 

[Propagate]

Thanks Terry, that makes sense.

Regarding asset protection, per my other thread, my thoughts at the moment (being that there will be two of us going in together) are:-

One x "Trading Company" joint owned 50/50. This company wins the contracts, pays the bills and expenses, leases the office and distributes the profits but does not own any assets.

Two x "Personal Company X & Y" Personally 100% owned and operated by the individual. Each individual purchase their required equipment and software etc through that company.

Companies X & Y are then essentially contracted to the "Trading Company" to carry out the work.

If extra workers are required at any time, they are contracted via the Trading Company.

I think that's the gist of it, but looking then into maximizing my cash buffer when it comes to the requires asset purchases for "Company X". Rather than use up cash, I'm looking for a way of using a home loan mortgage split as seed money for Company X (Company Y will be funded by however Company Y wants to fund itself), but only if I can claim deduction on the borrowed seed money in some way.

I think I'm getting closer to needing some commercial, paid for advice and start putting this down on paper.

Cheers.

 

[Terry_w]

I think that's the gist of it, but looking then into maximizing my cash buffer when it comes to the requires asset purchases for "Company X". Rather than use up cash, I'm looking for a way of using a home loan mortgage split as seed money for Company X (Company Y will be funded by however Company Y wants to fund itself), but only if I can claim deduction on the borrowed seed money in some way.

You could lend money to the company which would claim the interest. Trading company would pay lease to asset company for use of assets. This income would be offset by the interest deductions. The trading compayn's income would be reduce due to paying lease and therefore the company profit reduced thus reducing your personal income.

 

[Propagate]

Thanks Terry.