Director loaning money TO company?

[Apocalypse]

I'm sure I'm missing something obvious here, but I've down heaps of searching and most of it comes up with Division 7A issues regarding directors loaning money FROM their company.

But - if my company needs to purchase a capital asset worth, for example, $10000, and doesn't have the funds, instead of going to a bank or other finance provider, if I personally have the cash available can I lend it to the company? And at what interest rate? I'm certain you couldn't charge an exorbitant amount - would it be appropriate to use the statutory rate issued by the ATO - currently 5.85%? Is there anything that says it couldn't be less than this even?

 

[Rob G.]

Do you want to claim a tax deduction for personal borrowing to make the loan to the company ?

Do you want to secure your loan by a charge over that asset ?

Cheers,

Rob

 

[Propertunity]

It is pretty standard practice for Directors to make loans available to their own company from time to time, especially if the Dir has cash on hand and the company does not.

I would not be charging the company interest as this would be income taxed in the hands of the Dir who made the loan. When your company returns you the cash, it is just a loan repayment (not an income to the Dir).

AFAIK there are no rules about having to charge interest just because you personally lend to your entity.

 

[csc]

Capital injection loan...done every day..no big deal......chat to an accountant though re" any tax issues..

 

[coastymike]

Propertunity,

Rob raises some valid issues to consider. Althought the director will receive interest income they would also potentially obtain a deduction in their own name for on-lending the funds. Note Domjan case etc for caveat. The deduction then goes into the company.

Again another issues raised by Rob is the asset protection issues. What if the company goes under. The loan may not be deemed to be commercial without a commercial rate of interest being charged. Could also be argued that the money was an injection of capital and not a loan.

All things to discuss with your accountant and solicitor.

 

[Propertunity]

All things to discuss with your accountant and solicitor.

Yes, agreed - as with all things accounting - its the same answer

 

[Apocalypse]

Do you want to claim a tax deduction for personal borrowing to make the loan to the company ?

Do you want to secure your loan by a charge over that asset ?

Cheers,

Rob

Loan would come from cash on hand. Wouldn't claim a deduction if I charged interest - I would have to include the interest component as income in my personal tax return.

Wouldn't necessarily want to secure the loan if I didn't have to - I imagine that would introduce additional fees, etc. Are you suggesting registering a mortgage over it or similar?

Isn't one method of securing loans to an entity a director's guarantee? I'd be quite happy to provide one...

The ATO website says this regarding "genuine debt":

Genuine debt
A payment is not treated as a dividend if it is in discharge of an obligation owed by a private company to a shareholder or their associate, and the payment is not more than would have been required to discharge the obligation had the private company and shareholder or their associate been dealing with each other at arm's length.

Suggests to me charging interest at the statutory rate reinforces the 'commercial-ness' of the loan to avoid the misinterpretation of it being a capital injection.

 

[pennyk]

we have just changed accountants, and they were unhappy with the fact that we had loaned money to our company without drawing up a formal loan agreement, and say that they are not willing for us to claim the interest on the loan that we have in our personal names, which was used for the company.
So, their answer is that a loan agreement needs to be drawn up, a commercial interest rate must be charged. If this was done, we could claim the interest charged from to us from our bank loan, but we would also have to declare the interest payments made by the company to us.
So, its worthwhile getting some accounting advice prior to making the loan!
Pen

 

[Rob G.]

Loan would come from cash on hand. Wouldn't claim a deduction if I charged interest - I would have to include the interest component as income in my personal tax return.

Wouldn't necessarily want to secure the loan if I didn't have to - I imagine that would introduce additional fees, etc. Are you suggesting registering a mortgage over it or similar?

Isn't one method of securing loans to an entity a director's guarantee? I'd be quite happy to provide one...

The ATO website says this regarding "genuine debt":



Suggests to me charging interest at the statutory rate reinforces the 'commercial-ness' of the loan to avoid the misinterpretation of it being a capital injection.

One point of view ...

If lenders won't supply your company, there is not much point in risking more of your equity in the company which is up for grabs by any creditors.

You could make a personal loan to the company, but get a charge over some company assets like a chattel mortgage.

YES you will have to pay tax on the income, and will be entitled to make claim deductions for expenses like interest.

BUT the company also claims deductions for paying you that interest.

Given all the non-cash business depreciation allowances Kev is chucking around at the moment, the company might have insufficient franking credits to make tax effective distributions to you when you need to pay yourself. In this case lending from cash on hand might be worthwhile even though you don't claim personal deductions.

Hell, if you are acting as financier to the business, YOU could even purchase the asset and lease to the company so YOU get the depreciation deductions and asset security while your company deducts the lease payments.

As regards the statutory interest rate, this is for a first mortgage over residential property and would be way too low for an unsecured commercial loan !!

Many good small businesses are operating sub-optimum or even struggling because they are badly financed, so I suggest you talk to an Accountant about your options.

Cheers,

Rob

PS. Don't tell me that your company is merely a Trustee since all the above comments are then inappropriate !!

 

[Pushka]

Because we have paid Tax through our company from profits over the last few years, but have yet to declare all the dividends from the profit (and therefore the imputation tax of 30%) our accountant says we are actually giving the ATO a loan! Dont see them complaining about it though.

I have a sense that dividend imputation tax may start to be phased out, in which case we might be wise to declare all the imputation, around $60,000 in all. As we are only paying 15% tax rate because of neg gearing, that means that we will be receiving all our tax back.

The profits are because we prefer to see the company with an excess cash rather than pay ourselves appropriate salaries. Except what we have done this year is put the excess company cash into an offset account for our IP, and which reduces the mortgage by half. But this money must be returned by June 30.

 

[GreatPig]

we have paid Tax through our company from profits over the last few years, but have yet to declare all the dividends from the profit (and therefore the imputation tax of 30%)

Likewise with us.

I have a sense that dividend imputation tax may start to be phased out

I have a number of concerns now, of which that is one. Others are that Kev might decide high-income earners should contribute even more to the deficit he's building up, and increase the top marginal rate or Medicare levy, and that the general tightening of Div7a is going to make it harder and harder to use company funds effectively for investment.

I'm currently considering taking all the funds out of the company in one hit (officially over two years), instead of the 10 years as originally planned, because as well as the concerns above, I'm getting sick to death of the hassles and restrictions, the extra costs and paperwork, the loss of the 50% CGT discount, and the lack of flexibility. If I'd known back in the mid 90s when I formed the company what I know now, I'd have used a family trust back then - problem was I was single with no family here at the time, the 50% CGT discount hadn't been introduced yet, I had little idea about any of this sort of stuff anyway, and my accountant at the time was... well, let's say no Mohammad Ali (ie. not the greatest).

Due to the amount of funds though, a large part of the dividends will be taxed at the top rate (minus the 30% imputation), so I'll be looking for some serious tax deductions for the next two years!

Regarding the original question, I have a signficant interest-free personal loan to a company and it doesn't have any sort of formal loan agreement. However, it's always written up in the financial reports as being a loan rather than capital, and no shares or anything have been issued against it. My (current) accountant hasn't indicated any problem with this.

GP

 

[Pushka]

Thanks Great Pig, interesting that we share the concerns then.

 

[Rob G.]

Another approach is to try to build up your cost base with a view to selling the shares for a concessional capital gain.

Given that the retained profits have been taxed at 30%, some might prefer to take a fully franked dividend and then make a capital contribution to raise the cost base.

If the company runs a business, there may be CGT rollover concessions on sale as well.

All this should be discussed with your Accountant at the initial business structuring stage.

Cheers,

Rob

 

[GreatPig]

Hi Rob,

Given that the retained profits have been taxed at 30%, some might prefer to take a fully franked dividend and then make a capital contribution to raise the cost base.

Just trying to figure out what this would achieve. In my case, all the funds can be paid out fully franked, but I can't see how making a capital contribution (presumably after-tax) would help.

Also in my case, the company does nothing except hold funds, so no one would buy the shares. Even if the company could buy them back itself, for the value of the cash it holds, I'd lose the benefit of the franking credits, which are worth more than a 50% discount (the current cost base is next to nothing).

Cheers,
GP