Lending Structure and Appropriateness

Hamish Mexted Odds & Ends

The structure of your lending can be a very important thing – it can determine how much the bank is willing to lend you and also have an impact on the accounting and tax treatment of potential interest deductions.

The common folklore you will hear during conversations at the pub is that interest you pay on lending in your ‘business’ is deductible for income tax purposes regardless of whether it’s for business or private use.  Well, this may not always be the case.  The answer to this depends on the structure of the business you operate in.

Here’s a quick example of one of the differences:

If you operate as a sole trader, then a connection to your income earning activity has to be established before a deduction can be made.  Alternatively, if you operate as an ordinary Company, then the requirement for establishing a connection to the income earning activity is not required.

All too often, we come across many lending structures where talking to a tax advisor or accountant first could have helped.  We see a lot of people who have a profitable business in a Company structure with all borrowing being held in the owner’s personal name.  Here, lies the immediate opportunity to restructure your lending into your Company so that some (or all) of your interest will be tax deductible in nature.

Another common problem related to this is the situation where lending is made in the owner’s personal name (whether by a mistake of the bank or oversight) and is then on-lent to a Company for business purposes.  The Company then pays the interest and principal off on the owner’s behalf.  In this scenario, even though the essence of the lending is for business purposes, the Company nor the owner can take a deduction for the interest charged unless adequate documentation has been prepared.

These examples highlight the need to talk to us before any lending arrangements are entered into so that we can ensure your debt is structured correctly.  We can also assist with discussions on debt levels and loan serviceability to help you ensure that you can meet your minimum debt repayments.