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Borrowing to invest in a private company

Discussion in 'Accounting, Tax & Legal' started by Heavy, 31st Aug, 2009.

  1. Heavy

    Heavy Member

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    I think you guys should be able to shed some light on this situation.

    Background: Person 'A' has a company name that is primarily used to buy property and also some shares.
    Person 'B' obtains a loan in order to buy shares in this company.

    Question: Can person 'B' receive any tax benefits and if so, what are they.

    Also, feel free to discuss any pros and cons you can see.
     
  2. Rob G.

    Rob G. Well-Known Member

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    Person B can deduct interest for borrowings to purchase shares in the company where the purpose is to derive B's assessable income through dividends.

    The fact that the private company may be a related party leaves open the question as to whether there is another purpose for the borrowing, which may scale back the deductions allowed ?

    Lenders will probably require some other property as security since private company shares are not very negotiable.

    It is usually not good having a company as an investor because they do not get the CGT discount, and property depreciation deductions cannot be distributed tax-effectively because of a lack of franking credits.

    Consult a Taxation Advisor before entering into any transactions.

    Cheers,

    Rob
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Are you considering setting up a structure for investments, or does this company already exist and own property/shares?

    If this is something you are planning on doing, a trust (unit trust or discretionary trust) would probably be more appropriate, depending on the exact situation.
     
  4. Heavy

    Heavy Member

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    Thanks for the quick input.
    The main reason for this is to help B better manage their tax obligations, as they have a 270k salary package. Increasing their assessable income may not be the best approach as the interest deductions would be far outweighed.

    Rob, If by related party you mean director, employee etc, then no they aren't.
    So, if B doesn't derive an income from the investment, they aren't eligible for any tax benefits?
    I'm not worried about the CGT discount as I dont intend on selling any of the assets, although you have a very good point about the depreciation deductions being lost.

    Sim, this structure isnt in effect as yet. We are in the stage of developing one, so all of your recommendations are welcome. I originally chose a company because I dont like the idea of a vesting date and I intend on passing the assets to future generations with minimal fuss (tax).
    Although if a trust has many more advantages that are available now then the choice is easy.

    Another reason for this is to allow A to have control of the assets and take care of the investing.
    If you have any other ideas please discuss.
     
  5. Saskatoon

    Saskatoon Well-Known Member

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    Hi, have a look at the information on Tax Professionals Welcome. Plenty to read regarding the respective benefits of trusts and companies. The 'Estate Planning' section has interesting examples. (Not a recommendation for their services - no involvement!).

    I'm not worrying about the vesting date of our trust - who will the descendants be in 3 or 4 generations and what they will be like? Eighty years is a long time: look at the global changes since 1929 :)
     
  6. Heavy

    Heavy Member

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    Hey Saskatoon

    thanks for link, it had a lot of very useful information.

    PS. Good point on who the beneficiaries will be in 80 years time, and you never know what legislation will come about by that stage either.