This is an interesting issue I see quite often with clients. In many cases, clients who own an LTC will have a sizeable shareholder's current account in their LTC. Your "shareholder's current account" is the total sum of funds you have lent into the company over time, less what you have taken out.
In many cases, this can be in the hundreds of thousands of dollars for some clients as they may have advanced funds into the LTC for deposits on properties and then advanced funds in year after year to top up cash losses the LTC was making (especially back when interest rates were higher).
Having a shareholder's current account presents excellent tax planning opportunities. This is because the LTC is eligible for tax deductions on interest if it borrows funds to repay some or all of your shareholder's current accounts.
Take this hypothetical example (which is very, very common with clients, especially those with advisors who are not proactive):
Mum and Dad have 1 home in their family trust, and one rental in an LTC.
Home currently has MV of $1m, debt of $200k.
Rental in LTC has MV of $600k, debt of $400k.
Both properties are held by the same bank which has cross-security over both properties.
The LTC owes Mum and Dad $200k for a deposit they paid into the LTC personally, and for personally topping up the cash losses over a number of years (this is quite high given the facts above but is just an example).
You can instruct the bank to transfer the $200k debt currently in the Family Trust into the LTC. Obviously the bank retains cross security over both properties but on paper you are reducing the debt in the Family Trust by $200k and increasing the debt in the LTC by 200k. In conjunction with this you or your adviser should put together a simple letter to the LTC by you as the shareholders of the LTC, demanding some or all of the funds back, as the case may be.
At a long term average interest rate of 7.5%, this gives you extra interest deductions per year of $15,000, which equates to an in the hand cash benefit to Mum and Dad of $5,000 at a 33% tax rate, or $100 per week. At current interest rates of 5.5% this equates to annual cash benefit of $3,600 or $70 a week.
This is very straightforward tax planning and many PT'ers are no doubt already aware of this. However it is amazing how many advisors miss this simple tax planning opportunity. Note that it obviously only is useful if you have private, non deductible debt able to restructure. It can also be useful if you have made a decision to borrow funds for private purposes, say for house renovations. Interest on borrowings to do this would normally not be tax deductible as it is private. However, by calling up your shareholder's current account to fund the private works, you can make the borrowings tax deductible by shifting them into the LTC.
Note that the IRD has considered the above arrangement to be legitimate in a release put out shortly after the LTC regime was introduced.
As always though every case depends on the facts and you should seek advice from your professional advisors before entering into any restructuring.
In many cases, this can be in the hundreds of thousands of dollars for some clients as they may have advanced funds into the LTC for deposits on properties and then advanced funds in year after year to top up cash losses the LTC was making (especially back when interest rates were higher).
Having a shareholder's current account presents excellent tax planning opportunities. This is because the LTC is eligible for tax deductions on interest if it borrows funds to repay some or all of your shareholder's current accounts.
Take this hypothetical example (which is very, very common with clients, especially those with advisors who are not proactive):
Mum and Dad have 1 home in their family trust, and one rental in an LTC.
Home currently has MV of $1m, debt of $200k.
Rental in LTC has MV of $600k, debt of $400k.
Both properties are held by the same bank which has cross-security over both properties.
The LTC owes Mum and Dad $200k for a deposit they paid into the LTC personally, and for personally topping up the cash losses over a number of years (this is quite high given the facts above but is just an example).
You can instruct the bank to transfer the $200k debt currently in the Family Trust into the LTC. Obviously the bank retains cross security over both properties but on paper you are reducing the debt in the Family Trust by $200k and increasing the debt in the LTC by 200k. In conjunction with this you or your adviser should put together a simple letter to the LTC by you as the shareholders of the LTC, demanding some or all of the funds back, as the case may be.
At a long term average interest rate of 7.5%, this gives you extra interest deductions per year of $15,000, which equates to an in the hand cash benefit to Mum and Dad of $5,000 at a 33% tax rate, or $100 per week. At current interest rates of 5.5% this equates to annual cash benefit of $3,600 or $70 a week.
This is very straightforward tax planning and many PT'ers are no doubt already aware of this. However it is amazing how many advisors miss this simple tax planning opportunity. Note that it obviously only is useful if you have private, non deductible debt able to restructure. It can also be useful if you have made a decision to borrow funds for private purposes, say for house renovations. Interest on borrowings to do this would normally not be tax deductible as it is private. However, by calling up your shareholder's current account to fund the private works, you can make the borrowings tax deductible by shifting them into the LTC.
Note that the IRD has considered the above arrangement to be legitimate in a release put out shortly after the LTC regime was introduced.
As always though every case depends on the facts and you should seek advice from your professional advisors before entering into any restructuring.
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