The “tax trap” that many accountants recommend – transferring money backwards and forwards between company bank account and personal mortgage offset account:
Given the sharp and prolonged increase in interest rates, several of my clients have enquired about using surplus cash generated in their business (owned within a Pty Ltd company) to put into their personal home loan offset account.
Their previous advisors had suggested to them that they were permitted to do this without incurring any personal income tax and without falling foul of the ATO’s Division 7a legislation, provided they “borrow” and “return” the funds to the company bank account all within the same financial year. E.g they “borrow” $100k from their Pty Ltd company on 1st July, use this money to apply to their personal offset account, and then “return” the loan back to their company bank account on 30th June.
Then they can “borrow” the money again from their company on 1st July and do the exact same thing in the new financial year, rinse and repeat! It sounds like a great plan, getting to take advantage of the 25% tax rates that companies offer, saving some interest on your personal home loan while you’re at it, and paying no personal income tax!
I hate to be the bearer of bad news, but there is a specific area of the tax act that may prevent company owners from doing this. Income Tax Assessment Act 1936 – Section 109R. I am sure all of you are familiar with this legislation (sarcasm intended)! Essentially this legislation outlines situations in which the ATO may seek to “void” the subsequent loan repayment that is made back to the company just before 30th June.
If the ATO is successful in arguing that this legislation applies to your circumstances – Then engaging in this type of transaction could mean that the entire amount of money you took out of your company as a “loan” is taxable to you in full, without any franking credits to partially offset the tax liability!
If you want to take dividends from your company to pay into your personal offset account, or pay off personal mortgages, this is permissible, however you must be aware that this may cause a personal income tax liability for the shareholders. This is unavoidable, and business owners need to weigh up the cost / benefit of paying off personal mortgages. Namely, is the additional tax you pay from taking out a dividend from your company, more or less than the interest you save by reducing your home loan?
Please get in touch if you think this situation applies to you and we can talk you through all your options!
Disclaimer: This article is for general informational purposes only and does not take into account your individual circumstances. It is not intended as professional advice, and you should seek specific advice tailored to your needs from a qualified tax professional before making any decisions. Liability limited by a scheme approved under professional standards legislation.