A common one we do is pay the minimum repayments on the unsecured loan. Unsecured Division 7A loan is a 7-year term. There are minimum repayments and we can pay these in cash (transfer back). The alternative is to issue dividends to the shareholders, or pay salaries to the people running the business on paper, instead of paying them cash because it reduces the loan outstanding. Basically, if there is a $10,000 minimum repayment needed. We can issue a $10,000 salary, instead of transferring cash from the company to the personal account. You can reduce that off the loan that the person owes back to the company.
If you are taking more cash out each year, you can start a new loan in that financial year that you take more cash out of the company because it resets your 7 year repayment term. Some balance sheets may have –
Loan – (your name) 2020
Loan – (your name) 2021
Each loan may have its own financial year attached if you are drawing down more each year.
Sometimes this strategy is used when people are retiring and they are coming up to a business exit. So, we intentionally tax them less in their own names, build up a bit of a Division 7A loan in their company and once they are no longer earning income in the company, we pay down dividends back to the individuals to reduce the loan outstanding. Another way is to leave the money in the company and issue dividends each year to extract the money, once the business has sold or they’ve become retired.
Watch the full webinar, ‘Solving Company Loads Division/7A Problems ’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP
It is possible to avoid Division 7A altogether, but there are potential drawbacks because we don’t get access to cash personally, but that may be okay depending on your circumstances. Here are the long term solutions for division 7A.
Pay the cash back into the company and repay the loan. But the downside or the drawback is, it may be a poor use of funds.
If you’ve already paid 26% tax in the company name and you want to get access to that cash permanently, then you can issue dividends or salary depending on your structure, to the individuals in the family group. You may be taxed up to 47%, and we call that the top up tax of 21%.
We’ve got the bucket company because we wouldn’t want to buy shares in a trading entity because if you are in business, it is attracting risk in your entity. So, from an asset protection perspective, we don’t want to create an asset to potentially lose if something were to go wrong in the business. But we can bolt on a bucket company to one of your structures so that we can take the dividends out of your trading entity, put it in a bucket company, and buy shares or managed funds. There is a way to do it, but we don’t want to buy shares or managed funds in a trading entity.
If you buy shares or managed funds in a company, you do not get access to the 50% capital gains tax discount if you own shares, managed funds, assets, or property, for more than 12 months. You get a 50% discount in your own name, or in a trust name whilst in a company, you do not.
Shares or managed funds often have an income component and your tax rate on that is 26% or if it’s a purely investment company, you’ll be paying 30% tax on your dividends and trust distributions from the managed funds or shares.
And if you have capital growth assets, there are certain index funds that the goal is to produce an income stream and there are index funds where the goal is to grow in capital but not pay anywhere near as much income along the way because your priority is a capital gain. But you may want to structure it in a trust instead, so that you will be able to access a 50% discount if you were to sell the index fund or managed fund.
Watch the full webinar, ‘Solving Company Loads Division/7A Problems’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP
On a recent webinar, one of our attendees asked, “Please define an offset account, and does an offset account only exist for a home loan?”
Here’s our answer:
Some of the banks offer it with a mortgage. If you put $10,000 in your offset account, that will offset a portion of the interest up to the interest of $10,000 on your mortgage. It offsets interest on your home loan, and calculated every day that your money is sitting in that offset account.
Watch the full webinar, ‘Solving Company Loads Division/7A Problems ’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP
When Ben started in accounting, they had a couple of clients who had loans pre-1997, and they basically didn’t repay a cent because there were no requirements to abide by these sorts of rules.
But in general, the loans need to be documented. There’s a principal, and interest repayments required, a maximum term, and minimum repayments calculated per formula.
The interest rate each year is advised by the ATO and currently, it’s at 4.52%. It’s usually a few percent higher than you can get a home loan rate from and it has gone down over.
If the loan is unsecured, you have 7 years to pay. But if it is secured, you have 25 years to pay it back. And this is a little bit of a hint on one of our medium to long-term solutions for Division 7A loans.
It also applies to distributions from trusts. So, if you’ve made the hundred thousand dollars in a trust and you pay a portion to a bucket company and you distribute, you have to pay the cash to the bucket company. Otherwise, you create a Division 7A loan. It is not necessarily the worst thing in the world but we’ve just got to manage it.
Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant
What are your lending options inside super? LRBA is an acronym for Limited Recourse Borrowing Arrangement.
Super funds on their own can’t lend money from a bank or anything. They are not supposed to lend in their own right. In the right conditions, you can borrow using funds with your super and receive the income into your super fund if you have the right trust set up, the right loan agreements, and if they meet the requirements of the Superannuation Act.
For super contributions, the ones you make as an employee or as a business owner, whether they’re from the business or personal contributions, they can count towards your servicing of your borrowing capacity in your super fund.
If you are dropping $55,000 a year between you and your spouse, plus the rental income of your prospective property, it will do wonders for your borrowing capacity. But if you’re only chipping in $5 a year in contributions, you will be relying on rent and the lenders in space need to see a little bit of consistency.
You can’t just dump $50,000. You will need a bit of history if you need contributions to service, unless it’s a really high-yielding property, then you will probably need your super contributions, or a low loan.
Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant.
Here are the Process of Buying a Commercial Property:
The first step is to get preapproval or some idea that you can buy what you are looking to buy. If it’s Inside Super, you don’t necessarily need your SMSF set up – you could be looking but not have an SMSF. Whilst Outside Super is more simple than a home loan to get pre-approval for a commercial property. If you’ve found a property, set up an SMSF and a bare trust, a trust, or whichever structure you are using.
The bare trust is the lending vehicle, and the lead time is one to two months to be safe. Make sure when you look to buy something, you structure your set up to be able to sign the contract in the right name. If you don’t currently have an SMSF, the lead time on getting your existing super could take days or maybe one to two weeks.
Industry super funds are getting a lot better, but there’s still ones who make it difficult to take your super away because the sooner you do that, the less fees they get.
The setup of the SMSF and the paperwork itself wouldn’t take long for you to sign it, but what takes time is trying to get your money out of the industry super fund. And if you do make that decision, you want to pull that out, that industry super fund needs to be comfortable that the money doesn’t go to your secret bank account that you just go to Vegas with.
They want to make sure that it goes to a compliant super fund and it’s in the right name. There are checks and balances that they have to do before they release that. If you find a property in a hot property market, you’ve got to take this into account. You might lose out on property just because you haven’t got your ducks in a row. So, if it’s going to take some time and you are ready to do all this stuff, get in touch with your accountant first and make sure that it gets done as soon as possible.
Watch the full webinar, ‘How to buy your office, warehouse or clinic using your super fund’ at https://learning.benwalker.com/courses/howtobuyyouroffice
The first structure is in your own name, as a sole trader, or as an individual. Second is a company, third is trust, and fourth is a self-managed super fund.
There are three things that we look at, one is the tax rate. If you’re an individual, you can pay up to 47% in tax. Nearly half of your money goes to the ATO.
Then you’ve got the company where there are two different tax rates. You pay a flat tax at 26% or 30%, depending on how big your business is. More often than not, it’s at 26%. Or if you have passive investments, it’s in the 30% bracket and you have the trust where you pay 0% tax.
Trust is like a funnel and it doesn’t pay a tax on its own. It distributes to the beneficiaries, which could be a sole trader, an individual or a company, so you end up paying either 47% of tax, 26%, or 30%.
Self-managed super fund is 15% or 0%. Its sole purpose is for your retirement. Circling back to the age pension issue that we have in Australia, they’ve really given them some massive concessions when it comes to super. If you have investments in super, and you make money there before you retire, you pay 15% on all the income in that self-managed super fund and once you retire, it’s tax-free. The difference is once you are retired, they don’t want to clip you money because they want you to get tax-free income from your pension.
One of the major concessions that we have is a 50% CGT discount. So, if you sell a property, you make a $100K capital gain, and if you hold it for more than 12 months, you get a 50% capital gains discount. You get it as an individual, as a trust, and a self-managed super fund, but you don’t get it as a company.
Typically, we don’t like using individuals or companies where we kind of drive more of buying your commercial properties in trust and self-managed super fund.
With a trust and a self-managed super fund, you can effectively plan your asset protection strategies within your family. A self-managed super fund is fairly protected and that is one of the big benefits. If you ever go bankrupt, if people are trying to come after your assets, or for whatever reason, your super fund will be well protected.
You could own your commercial property outside of super but it is technically at a higher risk compared to your super. Your super is meant for your retirement and they want to protect that as much as possible.
If you compare all the structures overall, the self-managed super fund always has one of the best tax environments because it’s been 15% or 0% and you still get your capital gains discount. If you retire and you have all these properties and portfolios of shares or whatever that you invest in your self-managed super fund, you can start liquidating them and not worry about losing that capital to the tax man.
Watch the full webinar, ‘How to buy your office, warehouse or clinic using your super fund’ at https://learning.benwalker.com/courses/howtobuyyouroffice
Quick reminder, as an adult tax resident in Australia, you will get the first $20K or so of your income tax for free, that is called the tax free threshold. If you look at distributing $20K to one person at no tax versus giving it to yourself at 39% tax, you can save under $8K per person in tax, so it can add up to a decent tax saving.
Be careful if your retired parents are receiving Centrelink, because it affects their pension if they are receiving one from Centrelink which is their old age pension. But it does not affect the pension they receive through super or their own super fund because that is not taxable if they meet those certain conditions.
We’ve done the analysis on how you should distribute to someone’s retired parents and there is no cost benefit if they lose their pension. There is so much paperwork involved when you want to know everything about your trust. If a retired parent’s Centrelink pensions come in, keep in mind that they usually need to be self-funded retirees to help you out in that instance.
Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant.
BAS is an actual acronym for Bas And Super. BASes and superannuation are paid quarterly for GST purposes for most businesses.
We want to make small contributions throughout the quarter and then you will take a big hit when you need to pay BAS and super.
This is the account you do that in, not your main account. Because if you’re not having a separate account for this stuff, and you start seeing $50K, $100K, $200K build up in the main account, you will get excited and you might be spending money that is intended for GST and the Pay As You Go withholding from employees or even spending super.
Make sure that you are setting a small amount aside each week. Reduce the ups and downs in the main account because that is the whole purpose of doing that weekly contribution, and paying bills in full and on time every quarter.
Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant at https://inspire.accountants/chat
If you’re the main person running the income and you have no other salary or income from other sources, here’s a guideline:
We don’t want to take you up over $120K in taxable income and that is when the marginal tax rates go from 34.5% up to 39%. It used to be $90K, but now it went up to $120K which is a lot more especially if there is a couple, or a husband and wife in the business. That’s an extra $60K they can pay themselves personally at the same tax rate. For most of us that would be a potential to distribute to ourselves.
The next one is for your spouse, keep in mind of their magic number which is $120K. You probably don’t want to take them $120k because there might be other options that have a better tax outcome below. And this also goes for your retired parents, children, siblings and grandparents. Watch for HECS debts because that might add a few percent in tax.
You also need to watch for other income. If they don’t work, earning nothing or working in the business, they can get a clean slate for you to distribute $120K. But if they are working or receiving investment income in their own name, make sure that the $120K is in total in taxable income, but not in addition to what they are already receiving. You don’t want them to be already on a $100K salary and then get an additional $120K because you might not have the tax outcome that you want.
Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant
Get Cashed Up
Select your desired option below to share a direct link to this page.
Your friends or family will thank you later.