Hi,
I have a large amount of bad debt left over from a business venture that went pear shaped on me during the GFC. About 160K. Although it is sitting under the company structure that took the loan out, the company isn't trading. I have had to take a 9 to 5 job just to cover the repayments. This income cannot be pushed through the compnay carring the bad debt so the interest repayments cannot be deducted.
I don't mind having debt, just not debt that isn't working for me. I have spoken to my mortgage broker about rolling this bad business debt into an IP. It would mean paying more for the IP but at least now there is an asset working away gaining capital which could eventually offset the bad debt. My broker tells me this cannot be done because the business loan has been set up for a business and not a property and therefor cannot be rolled into an IP.
Does anyone have an ideas on how I might deal with this bad debt?
PJ
Hi PJ
About 5 years ago we folded our business and found it hard to refinance the business debt. The ANZ bank were non sympathetic and tried to force us to sell our PPOR. We talked to quite a few mortgage brokers and none could help, as they were unable to combine personal and business debt into our home loan. One suggested to talk to a mortgage originator and put us in touch with on of the few that are around. We were able to refinance and save our home from the ANZ. The loan was through Pepper Home Loans (they deal through brokers not direct) and interest was about 3% higher.We refinanced 18 months in with them to a more conventional rate and 6 months ago we have refinanced with our bank.
I don't know if this will help or you are able to finance an IP this way, but try a mortgage originator. They are able to arrange finance for just about anything.
Cheers
John
Hi John,
Thanks for the insight.
Sounds like you were in a similar boat I am in right now.
My objective is to, what I call, change the colour of the loan. From debt that is doing nothing but draw on my cashflow into debt which is for something appreciating my wealth. The obvious thing is to sell my PPOR and start agan however, that is an emotional step for my family and a definate last resort that may have far more damaging results.
John, is your original business loan now a 'different colour'? Is it now a mortgage or investment loan?
I have not heard of a mortgage originator. How do I find one to talk to?
PJ
PJ
We were forced to sell our IP by the bank and couldn't find anyone to refinance that in time , so our home mortgage ended up being refinanced. We have finally cleared everything up (5 years later) and have paid our mortgage back down to its original level. We basically have blacked out the last 5 years, but, we are much better now than if we were forced to sell our PPOR back then. Now its onwards and upwards…
We didn't know what a mortgage originator was either and were told to look for one in the phone book. Well that was a waste of time and it was the last mortgage broker that my wife talked to, that put us in touch with one. He thankfully dealt with arranging refinancing as well as dealing with our creditors.
We live in Kalgoorlie WA and the mortgage originator was in Perth and had no dramas working with him. I will dig out his details and forward them to you if you want, hey he may be able to help….
Where are you from?
Cheers
John
If you have a loss in the company you need the company to make a profit to offset the loss. You could also do something with a discretionary trust and then distribute profits to the company to offset the loss.
you won't be able to just transfer the loan to yourself personally and claim the interest. as it belong to the separate company.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
John,
I am in Perth. Any details would be appreciated. send them here : [email protected]
Terry,
I have enough equity to borrow an amount for an IP that includes the amount of bad debt. This loan would pay out the bed debt and purchase the IP. I would have paid more for the IP but I now have no bad debt loan draining my cashflow for nothing. This cashflow is now directed to the IP which at least has the chance to appreciate in value.
Thinking out aloud.
PJ
PJ
That won't really change anything. You will be borrowing to repay a business debt, so you will be unable to claim the interest. Its the purpose that counts.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
So, are we saying the only way i can pay this bad debt out is cold hard cash?
PJ
PJ
What Terry is saying is you can borrow at home loan rates subject to equity to repay the business debt but really wont do you much good as the interest wont be Tax deductible. In this case you would better of to have a split loan so you can pay down one and not the other.
As Terry also intimated if however you could direct income to a Family Trust and then back to the Company but will depend on your circumstances.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Yeah, that is not your debt but your company's debt. So you borrowing to pay it out won't be deductible. It may still be possible and advantageous though, depending on the circumstances.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Guys,
I am the guarantor of the loan. In cashflow terms the interest repayments are coming from my pocket.
In getting finance to buy an IP with extra to pay out the company debt (through a structure), I am not so concerned about the deductability, more the knowledge that my hard earned cash is now being used to service a loan that is towards an appreciating asset.
As it stands now my cashflow is being sucked into a loan that is doing nothing but sitting there.
PJ
PJ – sorry I don’t understand that. How would buying an IP help with cashflow? Sure it may go up in value, but why are you linking the IP and the debt? They are totally separate issues I think.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
At the moment my personal salary is being sucked into paying interest on a loan that is for nothing. The original loan was for a business that has been sold and unfortunately the sale has not paid out the original loan.Leaving me with bad debt. I have had to go and find a job to support the family and the bad debt. Thank god I have no mortgage.
I have no problems paying interest. I am happy to pay more interest if it was for a loan that is for an appreciating asset.
My thoughts (and they are obviously inexperienced thoughts) were to somehow change the purpose of the business debt to an investment loan by borrowing for an IP plus the amount of bad debt (using my family trust). Payout the bad debt and get it off the books. Close down that company and forget about. Move on.
I will be left with an IP that has cost me more than the asking price but at least my hard earned cash that is being used to pay its interest is going towards an IP and not just a hand out to the bank. This IP will be a -ve geared buy and hold and that's OK.
I may be way off the mark. Just trying to be pro-active about dealing with this bad debt. Some-how turning it from bad debt to good debt. "changing it's colour".
Maybe the only way to deal with the bad debt is to some how generate an income within the company that has the debt purely to offset it as you say.
Where I find the time to do that I don't know. I don't know about you but my 24 hours in a day seems to fly past.
I always appreciate your comments.
I am open to suggestions I can test with my accountant.
PJ
I think there are 2 issues here PJ.
The first is the capital loss. This will be trapped in the company and your company may not have any other capital gains to offset the loss which will mean it ends up wasted. You may be able to use income to offset the loss too – but income of the company not your income. (BTW did your company sell the business or the shares in the company which owns the business?)
The other issue is the guarantee. You may still be able to claim this personally if you are paying the loan of the company. I am not sure about this and it may depend on how it is all set up too, so you had better speak to an accountant.
The house is a totally separate issue. If you buy an investment property it won't change anything regarding the company or the guarantee. You can't just borrow extra and attribute it for the company or its debt. Deductibility will depend on what the borrowed money is spent on and the purpose it was spent.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
The company over the years has dabbled in many different ventures. Some successful, some have tanked. Currently it is a pty ltd company and I am the sole director/share holder. Its only form of income was the failed venture that was sold at a loss and has left this bad debt. The interest repayments are still rolling in and I am paying them using my personal salary. Just to keep the wolves from circling my PPOR.
I am not concerned about being able to use interest repayments to deal with tax. Tax is tax. In fact I want a tax problem because it means I am making too much money. The challenge I am trying to solve is the inefficient use of my cashflow. No problem paying interest, just not for a loan that is dead in the water.
You have confirmed what others have told me. I was hoping there was a creative way to solve the challenge.
It looks like the only way I can stop the flow of cash into the abis is to start another venture within the company and hope it generates enough income to at least off-set the debt (and that might be from a trust as mentioned) OR do a couple quick turn around IPs and pay out the loan to stop the cashflow hemorrhage OR win lotto.
Cheers
PJ
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