Is it better to pay off business debt or mortgage first?

[Orks]

So, I bought a business a year or so ago and it's doing fairly well. I have a reasonable chunk of profit I'd like to use to pay down some debt, but I'm not sure whether it is better to pay down my business debt or mortage. The mortgage is obviously non deductible, but to pay it off I would need to pay myself a dividend from the company and pay the tax on that before I can use it to pay off my mortgage. The business debt is at a higher interest rate, but it's deductible. It's also interest only but it's a lot bigger amount than my mortgage so I'd like to reduce it.

Thoughts?

 

[nhg]

What stage is your business at?

I have a friend who's family has several properties. They purchased all their property under the business to avoid paying tax as you mentioned.

Problem is, the business has been doing bad lately and everything is all interconnected, they could loose it all 'PPOR' included.

A part of using a PTY LTD is to protect your assets from a bad business. It doesn't work if all your assets are under the business.

Perhaps it is a good idea as Risk Mitigation, if you don't need the funds to pull a portion of it out to pay of your personal loan and keep it somewhat secure.

 

[BayView]

PPoR mortgage is non-deductible debt.

Business is deductible debt; therefore costs less.

Speak to your accountant, but you may also be able to take some funds from the bus as a "loan" to you as the Director?

You have to repay the loan in due course, but it is a business expense. You use the funds as required - talk to the bean counter though.

At the end of the day; it's all debt reduction, so the larger amount at higher rate being reduced is still good.

Smell the roses.

 

[Rolf Latham]

What stage is your business at?

I have a friend who's family has several properties. They purchased all their property under the business to avoid paying tax as you mentioned.

Problem is, the business has been doing bad lately and everything is all interconnected, they could loose it all 'PPOR' included.

and quite possibly, with the one lender AND crossed to boot ...........

ta
rolf

 

[nhg]

and quite possibly, with the one lender AND crossed to boot ...........

ta
rolf

Possibly

It's a $20M business started from scratch, don't think they thought it could go broke.

 

[Ace in the Hole]

Don't pay off any debt, chuck it in offsets.
Why can't your biz profits sit in your PPOR offset?
Just be sure to return it to the biz prior to end of financial year.

 

[Orks]

Don't pay off any debt, chuck it in offsets.
Why can't your biz profits sit in your PPOR offset?
Just be sure to return it to the biz prior to end of financial year.

Is that possible without setting up a loan agreement between the companies?

Obviously I should ask my bean counter this stuff but would still appreciate thoughts from SS.

 

[Terry_w]

What about paying down the PPOR loan and then reborrow it and onlend to the company to pay down its external debt - probably an interest rate saving here too.

 

[ok180]

A few questions.

How big is the business debt compared to the PPOR debt.

Do you have bigger plans for the business or are you happy with it as is? If you are happy with it as is I would just let the debt grind away and smash the PPOR loan. If you want to expand it you might need more capital so it would be better to pay down the business debt so you can borrow again to expand.

 

[BayView]

What about paying down the PPOR loan and then reborrow it and onlend to the company to pay down its external debt - probably an interest rate saving here too.

I think he's trying to avoid the tax to be paid if he takes a dividend to pay the PPoR mortgage.

 

[Terry_w]

I think he's trying to avoid the tax to be paid if he takes a dividend to pay the PPoR mortgage.

In that case there would be only 3 options:
1. get it out as a wage
2. get it out as dividends - hope a trust is shareholder?
3. Borrow it from the company

If you borrow from the company then you need to look into Div 7A rules. A company can only lend an associate money if there is a written loan agreement and benchmark interest rates are met - 7% approxx for a secured loan. If not done properly then it would be deemed a dividend and therefore taxable.

I am not sure if a company could lend upfront and the loan be repaid before 30 june to get around the Div7A rules.

Another option may be to have your company pay your wage for the year upfront - assuming it has the cashflow. Parkinng this in offset should save a fair bit of interest.

What about employing other family members on lower incomes.

 

[Orks]

A few questions.

How big is the business debt compared to the PPOR debt.

Do you have bigger plans for the business or are you happy with it as is? If you are happy with it as is I would just let the debt grind away and smash the PPOR loan. If you want to expand it you might need more capital so it would be better to pay down the business debt so you can borrow again to expand.

Business debt is about four times the size of mortgage.

It makes very solid profits as is but could do with some modernising, but it could chug away as is for four or five years churning out pretty reliable profits. I could get rid of the mortgage in a couple of years if I paid the tax to get it out of the company, but the size of the business loan makes me nervous even though the business easily covers it.

 

[Scott No Mates]

If the business doesn't do anything it will pay tax, if it distributes the dividend it pays approx 30% tax and you or the other shareholders get a tax credit at the same rate.

Have a serious discussion with your accountant.