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Personal loans for business use

Discussion in 'Accounting, Tax & Legal' started by Ykoops, 5th Jun, 2011.

  1. Ykoops

    Ykoops New Member

    Joined:
    5th Jun, 2011
    Posts:
    2
    Location:
    Perth
    Hello all,

    This is my first post!

    I've had my own small business for the past 5 years (setup as a Pty Ltd company), whilst also working in my regular full-time job.

    During this time, I have taken out different personal loans to finance my business. That is, I was still personally liable for repaying the loan - but they were to invest in my business.

    * * * * * * * * * *

    I had a few questions regarding this:

    1) Am I able to claim back, or offset, the interest on these personal loans - against the money I've been taxed from my full-time employment?

    2) If so;
    Would this allow me to claim back the entire interest I've paid on these loans (assuming it was less than the tax I paid for my employment salary)?
    or,
    Would this only allow me to claim back a portion of the interest as a tax offset.?

    3) Would all of the loaned amount have to be used for the business? e.g. What if I took out a $15,000 loan - but only used $14,000 for the business and kept the remaining thousand.

    * * * * * * * * * * *

    Any advice or knowledge would be greatly appreciated :)

    Thanks so much for your time.

    Ykoops
     
  2. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Hi,

    So the facts are that you conduct a business through a company.

    You have a separate job.

    How does the company pay you ? Directors fees, salary, franked dividends ?

    If you have on-lent the money to the company on non-commercial terms and cannot trace your personal income to that precise transaction, then you may have a problem.

    Read ATO ID 2003/519 (withdrawn).

    Cheers,

    Rob
     
  3. Ykoops

    Ykoops New Member

    Joined:
    5th Jun, 2011
    Posts:
    2
    Location:
    Perth
    Hi Rob,

    Thanks for the reply.

    Firstly, thanks for the 'ATO ID 2003/519' information. Just had a read through.

    Secondly, yes you're correct: I conduct a business through company. And I have a separate job.

    When I first created the company, I was informed that any money invested into the company is essentially loaned (that is, the company owes me this money). All deposits into the business account were labelled 'Loan from <my name>' in the bank transfer description, as well as our business accounting records.

    The business/company was a failed investment. It lost money every financial year it was running (next week we will be closing the company down). As such, it never 'paid' me anything (e.g. salary, Director's fees or dividends), nor was I an employee of my own business (only a Director). Does this change my circumstances or eligibility at all for claiming back this interest?

    Cheers again,

    Ykoops
     
  4. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Whether you have a loan is determined by more than a mere journal entry.

    The other problem seems to be that it is interest-free and consequently not earning assessable income to you.

    However, if you own all the shares and no associates are directors/employees for income splitting purposes you might be able to rely on the Total Holdings (Australia) case, see IT2606.

    However, if there was no real prospect of the company making a profit then you could not use this precedent.

    Where your 'business' was principally the provision of your own personal services and caught by the PSI regime then there may be some scope for claims or set-off against other income. This provision generally treats the business as if you conducted it.

    The costs of winding up a business, including deregistering a company, may be deductible over time to you.

    Where the 'business' was treated as subject to Division 35 non-commercial loss provisions then you might not be able to use any expenses or losses against other income (probably inapplicable if carried on through a company).

    The loan is a CGT asset to you, and where not deemed a personal use asset, you might be able to carry a capital loss against future capital gains.

    Your facts are too vague to know with any certainty, which is where your Accountant should be the best person to talk to.

    Sometimes it is better to start a business in your own name or in partnership with plenty of insurance until the activity takes off. If it fails, then the losses are yours, and if it is successful then it is easy to roll the business over into a wholly owned company without nasty tax consequences at changeover.

    Cheers,

    Rob