Transferring business cash to your home loan

June 2016

Moving money from your business account to your home loan? Be very careful about how you do it and ensure that the process is documented.

One of the more concerning trends in recent times is the advice from some banks to homeowners to use business cash to pay down their mortgages. While it might make some sense to use excess cash in your business, there are some significant potential consequences for business owners who decide to do it.

Money within your business account belongs to your business; it's not personal cash and can't be taken out of the business for personal use even if you own the business.

Division 7A

If you run a company, there are a set of tax rules called Division 7A. It's a particularly tricky piece of tax law designed to prevent business owners from taking funds out of their business when the funds haven't been taxed at the individual rate, only the corporate tax rate.

While these amounts are often debited to the shareholder's loan account in financial statements - usually you, the business owner – Division 7A rules ensure that any payments, loans or forgiven debts are treated as if they were dividends from the business for tax purpose unless there is a valid shareholder loan agreement in place.

The consequence of paying your home loan with your business money

If you take money from your company bank account to pay down your personal home loan, the ATO might treat it as a deemed dividend and you'll need to declare the amount in your personal tax return. The dividend is not frankable. Even if the company tax has already been paid on the amount, you'll be taxed on it again without the ability to claim a credit for the tax already paid by the company. It's essentially double taxation.

Ensure your loan agreements are in place

If you decide to take money out of the company account for personal purposes, you can either pay back the amount or put a complying loan agreement in place before the earlier of the due date and actual lodgement of the company's tax return for that year.

To be a complying loan agreement, the agreement requires minimum payments to be made over a set period of time, applying the minimum benchmark interest rate to payments (currently 5.45%).

The rules are also very strict when it comes to loan repayments because these can be ignored if it looks like you're planning to borrow a similar or larger amount again from the company. A similar issue can also arise if you transfer funds from a trust bank account, especially where that trust already owes amounts to a related company in the form of unpaid distributions.

Get advice

Before you take money from your company account, it's best to speak to your accountant and make sure your documentation is in place. As always, documentation is the key to stating on the right side of the ATO should they audit the business or challenge your personal tax returns.

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.