REVOLVING CREDIT- HIDDEN COSTS
These products are promoted as minimising interest costs and the term of the loan. But the ability to redraw, if exercised, will negate some of the savings. And, if the facility combines business and private borrowings, the apportionment of interest can create a tax headache and in extreme cases a complete haemorrhage.
For example, a farmer has a flexiloan which permits deposits and redraws up to a set limit at any time. Deposits are made to reduce the loan balance by $60,000. Later on the farmer draws down $40,000 for a new boat.
Here’s the rub. The interest on the boat is not tax deductible – ouch! Tax deductibility requires a link between the money borrowed and earning taxable income. No link - no deduction.
Our farmer example was straightforward. Imagine what happens when the flexiloan goes: up for a boat, down for a dairy cheque, up for a trip to Aussie, up to buy more cows and pay provisional tax, down for a stock sale deposit. Technically each draw down must be tested for a link to the farming business. Analysing the interest is an accountants nightmare. He/she has to look at each and every transaction and calculate a new percentage of interest to claim for business from that transaction.
To avoid the work involved in analysing the loan interest, we recommend:
and business transactions are kept separate.
· Planning before paying extra off your business loan. It may be more efficient to hold surplus cash in a savings account rather than repay the business loan and have to draw again for private spending.
up two flexiloans: one for the
business and the other for private transactions.
Loan interest is often a “big ticket” item for businesses. Losing part or all of the tax deduction for interest can be a big cost, and taxpayers may get pretty upset if their accountants have to tell them some of their interest bill is not deductible.
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