Lending money to a company to buy property

[Deltaberry]

Some quick but difficult questions for the tax experts and lawyers.

What are the implications of shareholders disproportinately injecting capital into a company (for the purpose of acquiring real estate)? The money can be presumably treated as:

1. Gift
- Implications are the shareholders have no claim to the money
- To the extent the shareholders borrowed the money from other sources, it would not be tax deductible
- Is this allowed?
- If one of the shareholders lending money is a company (Co B) with minority shareholders, can the minority shareholders of Co B claim oppression of minorities or breach of director duties?

2. Debt
- The company would owe the shareholders money
- The company would need to pay the shareholders a market interest rate (ie 5-6%)
- If the company does not pay the shareholders a market interest rate, is there a risk that the "debt" injection would be treated as an equity injection?
- If the company does not pay the shareholders a market interest rate (let's say it pays 0% interest), does that mean any money borrowed by the shareholders to make this investment is not tax deductible?
- If one of the shareholders was a company (Co B), would the minority shareholders in Co B have a claim to oppression of minority shareholders or breach of director duties, if a market interest rate was paid? Does this change if a sub-market interest rate or nil interest rate was paid?


3. Equity Investment
- This one seems relatively straight forward to me
- The money would be treated as consideration for shares
- What if the shareholders put in money disproportionate to their shareholding, does that create an issue? Would you treat part of it as debt, part of it as equity for the shareholder that put in more money?

 

[RPI]

1. The shareholder should not be an individual when you have unrelated parties. You may find yourself in bed with the other party's creditors.

2. Is a company the best structure to buy the property in in the first place?

 

[Paul@PFI]

The shareholders in the company don't have a right to call for profit in a company. The shareholders only earn income when and if the Directors resolve to pay a dividend.

A company doesn't receive "gifts"...If it does I want shares !! Such a credit to the company accounts would be considered a loan in the absence of evidence of how the Directors treat the receipt..ie allocation of shares = capital. It could also be monies held on trust....

Corporations Act requires Directors to act and do certain things. ie shares must be applied for, allotted, recorded in registers etc.

Companies are a very poor investment vehicle unless there is a business and diversity of shareholders who ONLY seek passive income in return for equity (eg Shares in AV Jennings / Stockland). One of the most compelling arguments why you avoid them is found in Superannuation Law of all places. SIS Reg 13.22 is the area which deals with ungeared unit trusts. Yet it also refers to companies !!! But I can say I have NEVER seen one used.

I would be concerned that the ATO could see a "loan" as being a injection into the company (maybe income) and when it is repaid see it as a dividend.....Plenty of ATO stouches are over "loans"

 

[Deltaberry]

1. The shareholder should not be an individual when you have unrelated parties. You may find yourself in bed with the other party's creditors.

2. Is a company the best structure to buy the property in in the first place?

It's not the best structure, but a legacy problem so that can't be changed. I was going to engage one of the big 4 to see if we can restructure it back into a unit trust imposed on a unit trust, but the partners' preliminary view was we'd have to pay stamp duty.

@Paul - if the injection was treated as a loan, do you believe the the company would have to pay market interest rates to the shareholders, or can it not pay interest?

 

[Paul@PFI]

Does it make a profit ?? Div 7A isn't concerned with loss. Just profit.

 

[Paul@PFI]

It's not the best structure, but a legacy problem so that can't be changed. I was going to engage one of the big 4 to see if we can restructure it back into a unit trust imposed on a unit trust, but the partners' preliminary view was we'd have to pay stamp duty.

@Paul - if the injection was treated as a loan, do you believe the the company would have to pay market interest rates to the shareholders, or can it not pay interest?

Big 4 to ask that...I wont charge you and I say YES THAT IS DUTIABLE AND A CGT EVENT.

But there can be ways.....

 

[Paul@PFI]

Some quick but difficult questions for the tax experts and lawyers.

What are the implications of shareholders disproportinately injecting capital into a company (for the purpose of acquiring real estate)? The money can be presumably treated as:

1. Gift
- Implications are the shareholders have no claim to the money
- To the extent the shareholders borrowed the money from other sources, it would not be tax deductible
- Is this allowed?
- If one of the shareholders lending money is a company (Co B) with minority shareholders, can the minority shareholders of Co B claim oppression of minorities or breach of director duties?

2. Debt
- The company would owe the shareholders money
- The company would need to pay the shareholders a market interest rate (ie 5-6%)
- If the company does not pay the shareholders a market interest rate, is there a risk that the "debt" injection would be treated as an equity injection?
- If the company does not pay the shareholders a market interest rate (let's say it pays 0% interest), does that mean any money borrowed by the shareholders to make this investment is not tax deductible?
- If one of the shareholders was a company (Co B), would the minority shareholders in Co B have a claim to oppression of minority shareholders or breach of director duties, if a market interest rate was paid? Does this change if a sub-market interest rate or nil interest rate was paid?


3. Equity Investment
- This one seems relatively straight forward to me
- The money would be treated as consideration for shares
- What if the shareholders put in money disproportionate to their shareholding, does that create an issue? Would you treat part of it as debt, part of it as equity for the shareholder that put in more money?

I recently dealt with a company like this...It can be very messy and there are ways....Send a mail to my email below and we can have a talk.
- Sml Business Concessions ?
- Demerger
- CGT rollover
- Liquidation
Sometimes you have to think bigger to fix smaller issues.

 

[Terry_w]

a company is a legal person and like any person it can recceive gifts. But there are tax implications.

A company can also loan another company money, but this could amount to oppression of minority shareholders.

Also keep in mind the estate planning aspects. Moving monies around can disadantage an individual if an unexpect death occurs. So consider this and also documentating everything.

 

[Paul@PFI]

a company is a legal person and like any person it can receive gifts. But there are tax implications.

I have always believed a Director should be very careful about such "gifts". Fiduciary obligations and even Criminal acts (AML etc). Yes taxes is one such concern...The ATO view in many rulings I see adopts the view that all amounts received are ordinary income unless the contrary is capable of being evident AND they accept that view. Gifting to a company may also lack all the hallmarks of ownership. After all if one gifts money or property they may need to own it for it to be a gift. An implied assumption of source and ownership can arise. And the company in receipt may have no legal claim to hold it. eg it is proceeds of crime? This avenue is very common for actions by ATO, Creditors, Liquidators etc. They argue that the proceeds are on trust at best. A bare trust, a constructive trust- a sham. Or a loan on at call terms merely labelled a gift in a sham arrangement. Defence is difficult since the person who made the gift must come forward.

I have seen clients in dispute with ATO have related party bank accounts raided on this basis.

Debt can be a bit similar. Look at the thin cap provisions. They seek to nullify terms of a loan so that it is capital. Then there are provisions which can look at capital and consider it a payment out of profits too.

 

[Terry_w]

I have always believed a Director should be very careful about such "gifts". Fiduciary obligations and even Criminal acts (AML etc). Yes taxes is one such concern...The ATO view in many rulings I see adopts the view that all amounts received are ordinary income unless the contrary is capable of being evident AND they accept that view. Gifting to a company may also lack all the hallmarks of ownership. After all if one gifts money or property they may need to own it for it to be a gift. An implied assumption of source and ownership can arise. And the company in receipt may have no legal claim to hold it. eg it is proceeds of crime? This avenue is very common for actions by ATO, Creditors, Liquidators etc. They argue that the proceeds are on trust at best. A bare trust, a constructive trust- a sham. Or a loan on at call terms merely labelled a gift in a sham arrangement. Defence is difficult since the person who made the gift must come forward.

I have seen clients in dispute with ATO have related party bank accounts raided on this basis.

Debt can be a bit similar. Look at the thin cap provisions. They seek to nullify terms of a loan so that it is capital. Then there are provisions which can look at capital and consider it a payment out of profits too.

wow. I don't see any of those issues here. The above could apply to any gift.

 

[dan c]

if the injection was treated as a loan, do you believe the the company would have to pay market interest rates to the shareholders, or can it not pay interest?

Re: interest payable by the company, are the lenders residents of Australia? If not, the Thin Cap rules may make paying interest difficult.

 

[Deltaberry]

Yes they are resident entities.

 

[Rob G.]

Re: interest payable by the company, are the lenders residents of Australia? If not, the Thin Cap rules may make paying interest difficult.

De minimis exception is proposed to be raised from existing $250k to $2m.

That is a lot of interest deductions by SS standards.

 

[Rob G.]

Some quick but difficult questions for the tax experts and lawyers.

What are the implications of shareholders disproportinately injecting capital into a company (for the purpose of acquiring real estate)? The money can be presumably treated as:

1. Gift
- Implications are the shareholders have no claim to the money usually
- To the extent the shareholders borrowed the money from other sources, it would not be tax deductible usually
- Is this allowed? no legal impediment, subject to constitution etc.
- If one of the shareholders lending money is a company (Co B) with minority shareholders, can the minority shareholders of Co B claim oppression of minorities or breach of director duties? possible, depending upon facts

2. Debt
- The company would owe the shareholders money usually, subject to statute of limitations etc.
- The company would need to pay the shareholders a market interest rate (ie 5-6%) not necessarily, depends upon the loan contract
- If the company does not pay the shareholders a market interest rate, is there a risk that the "debt" injection would be treated as an equity injection? Not if the loan contract requires repayment of principal within 10 years or a related party at call loan to a small company conducting a business
- If the company does not pay the shareholders a market interest rate (let's say it pays 0% interest), does that mean any money borrowed by the shareholders to make this investment is not tax deductible? usually, possible exception if sole shareholder is a company
- If one of the shareholders was a company (Co B), would the minority shareholders in Co B have a claim to oppression of minority shareholders or breach of director duties, if a market interest rate was paid? Does this change if a sub-market interest rate or nil interest rate was paid? possibly oppressive depending upon facts


3. Equity Investment
- This one seems relatively straight forward to me
- The money would be treated as consideration for shares why ? There must be an instalment or call payable for there to be a credit to the paid up capital - look at the Corporations Law and constitution
- What if the shareholders put in money disproportionate to their shareholding, does that create an issue? Would you treat part of it as debt, part of it as equity for the shareholder that put in more money? Could be breaching Corporations Law by treating shareholders within a class differently. Could be cost base and value shifting issues.

Your facts are far too vague to even hazard a guess at what you might want to try and why.

Book an hour with a very competent commercial lawyer to sound out your options.