Double Bill
The Age
Monday April 3, 2000
Investors who borrow funds from small businesses they run can face nasty tax bills if they fail to structure these loans correctly, according to a tax expert.
Clive Bird, a tax partner with William Buck Chartered Accountants, says that if the conditions on "private company loans" fail to satisfy set criteria, the tax office will treat the borrowings as unfranked dividends, taxable in the borrower's hands at their own personal tax rate.
While the conditions apply to loans made since 4 December 1997, private company loans taken out before this date but whose terms were varied after it could also strike trouble, he says.
So what does this mean?
If the $1000 "loan" you took from your company's account fails the Tax Act tests, you could pay up to $485 tax on it, and the loan is left outstanding. If you repay the loan amount in the same tax year you borrowed it, however, the tax office will not impose this tax treatment on the funds.
But to make other loans borrowed and repaid over two or more financial years comply with tax law, Mr Bird says they must meet set criteria.These include:
? The interest rate should not be less than the Reserve Bank's variable housing loan indicator lending rate;
? Unsecured private company loans must be repaid within seven years, while secured loans must be repaid within 25 years, and be secured by real property worth at least 110 per cent of the loan;
? Minimum annual repayments are based on a statutory formula that should result in the loan being repaid over the set period;
? An agreement stipulating all this should be in place before money is lent.
Loans to small business owners' associates can also be scrutinised, Mr Bird says, including those to owners' trusts, relatives and business partners, or to related companies.
Initially this tax law aimed to stop company owners taking profit from their business's till as a "repayable loan" with only 36 per cent tax paid on it. They may have wanted to defer paying top-up tax payable on company dividends.
© 2000 The Age