The average Australian family is paying over $25,000 interest per year on their $450,000 home mortgage. Making these interest payments tax deductible will on average save them $10,000 tax year one, and $150,000 over the loan term.
The actual process to achieve these tax savings depends on the taxpayer’s personal circumstances and the entity type that actually operates the business.
- For individuals operating the business as sole traders, implementing the strategy involves selling the business at arms-length market values to a company or trust entity. The entity purchasing the business will get a bank loan to fund the purchase (with the interest being tax deductible). The individual vendor will use the sale proceeds to pay down their non-deductible private mortgage.
- Individuals operating the business in partnership have two options. Firstly, have the partnership get a loan to fund the repayment of the partner’s capital accounts (money originally advanced by a partner to fund the business). The interest on this loan will be deductible. Secondly, the partnership sells the business at arms-length market values to a company or trust entity.
- Unit trusts operating the business will get a bank loan to fund a unit holder-buyback to reduce the unit holders paid up capital to nil. The unit trust loan interest will be tax deductible and the unit holders will have the capital they originally invest in the unit trust returned tax free.
- Companies operating the business will get a bank loan to fund a share-buyback to reduce the paid up capital to nil. The company loan interest will be tax deductible and the shareholders will have the capital they originally invested in the company returned tax free. Alternatively, a shareholder in the company operating the business sells their share-holding at market values to their spouse or a related entity. The spouse purchases the shares utilising a new bank loan and claims the interest as a deduction (against expected future dividend income).
Please Note: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.