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Tax Effective Borrowing

Before borrowing any funds for your business, it’s important to take the taxation implications into consideration, and take professional advice from an experienced mentor, financial advisor, or financial lawyer where possible. You should also ensure to reduce the level of your private debt, to reduce the net cost of debt prior to incurring any tax-deductible debt.

Convert Non-Deductible Interest:

In some cases, it may be possible to convert non-deductible interest payments on a private loan to tax-deductible interest payments, if the company borrows the funds. For example, this may be possible in an SME, where a shareholder or director of a company is currently repaying a private loan such as a mortgage. However, the company must have sufficient accumulated profits and franking credits to pay the dividend.

Deduction for Post-Business Interest:

In some cases, the ATO will allow deductions for interest paid after a business has stopped earning an income. For example, this may apply if the business incurs an unavoidable stream of outgoings after funding was borrowed solely for an income-earning purpose, with no legal entitlement to repay the principal.

Investment Loan Interest:

You may be able to ask your bank if you can defer repayments on your rental property loan for as long as possible. However, in this case, it’s a good idea to have some separate levels of minimum payment for both your residential and rental property loans. It’s advisable to try and maximise the percentage borrowing against your rental property, and use any excess cash to repay the loan as quickly as possible. You may be able to increase your rental property borrowings, or maintain a separate overdraft account to cover costs related to the upkeep and maintenance of your rental property. If you are married, you may be able to gain more tax deductions by considering the possibility of intra-marriage transfers; for example, if you are planning to rent out a jointly-owned home, consider transferring it into the name of just one spouse, who will borrow to make the acquisition.

Funding Super Contributions for Employees:

If you are an employer, you may consider borrowing to fund super contributions on behalf of your employees, if you have limited funds but large expenses of a non-deductible nature. Limited funds can then be used to pay any non-deductible expenses. However, it’s important to note that any charges and payments incurred as a result of superannuation payments not being made on time will not be tax-deductible and penalties may apply.

It’s important to take care when borrowing and get your borrowing and repayments right the first time; choose quality assets to invest in and always take professional financial advice.


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