Private Loans Scrutiny
The Age
Tuesday October 12, 1999
ENTREPRENEURS injecting private funds into their high-technology start-up companies could face tax bills on any repayment made to them if their loan does not meet certain conditions, according to a tax expert.
Clive Bird, tax partner with William Buck Chartered Accountants, said John Ralph's Review of Business Taxation suggested that if such private loans did not satisfy set conditions, then repayments made to lenders by profitable businesses after 1 July 2001 could be treated as taxable distributions of profit.
If accepted by the Government and passed by the Senate, the conditions would apply to loans made after 22February 2000. Such loans may include high-tech company owners putting funds into their business, leaving the company to repay them later.
If repayments are deemed to be profit distributions, on which the company has paid corporate tax at 36 per cent, the taxpayer may have to pay ``top-up tax" of the difference between that 36 per cent and their own marginal tax rate, possibly up to 48.5 per cent.
This payable difference could increase if the company tax rate falls to 30 per cent.
The Ralph review suggested that, for repayments to avoid this, private loans should satisfy preconditions set out elsewhere in the Tax Act.
No minimum loan repayments are set, but the company should repay unsecured private loans within seven years, and secured loans within 25 years. Bird said secured loans would need real property worth 110 per cent of the loan amount as security.
``It will be hard to make secured loans with real property worth 110 per cent (of the loan), so you'll probably be locked into a seven-year loan whether you like it or not, which is very tough on new companies," Bird said.
He said the Government aimed to make private companies first pay out their profits before making non-taxable loan repayments.
``There's a real resistance to an ability to shelter profits in an entity at a lower entity tax rate (presently 36 per cent), but still to be able to access that money in other ways by repaying the loans," Bird said.
``If you're taking company profit out as loan repayments to get money back to the owners, the Government wants to see top-up tax paid," he said.
© 1999 The Age