My wife is looking to take out a LOC against our PPOR for running her business. Our PPOR is in joint names. Because of this the bank wants both our signatures on the LOC for her business.
However, the sole purpose of the debt will be to run my wifes business:
1) Does it matter for tax purposes that the security for the business LOC is in joint names?
2) Does it matter for tax purposes that I will be a signatory of the loan, ie. does it mean my wife can only claim 50% of the tax benefit if my signature is on the loan?
I suppose what I'm getting at does the structure of the loan or the security it is held against over ride the purpose for which the loan is made. Any insight into this will be greatly appreciated.
Regards,
Andrew
itsandrew
Go as far as you can see and you will see further.
You will both be jointly onlending the money to your wife.
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
Is the LOC in one name as if it is you may be required to have a solicitor explain the downside risks of this.
I have an LOC in my wife's name but I am co guarantor so I have risk involved and had to have a solicitor explain this and stamp the loan document that the solicitor had explained it to me.Best to avoid guarantees i think. This only doubles the risk and reduces borrowing capacity.
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
Not sure if I agree Terry.
If two people are on title two people need to agree to borrow against that property in the capacity of either applicant or guarantor.
For example the line of credit could be in one of the following structures;
joint names
her name only with his guarantee
a company name ( if one exisits) with his and her guarantee.Either way, if borrower or guarantor, it will be taken in to consideration for future borrowing.
Note; you can’t secured a debt, loan or line of credit, against a property without all title holders being guarantor or borrower. Otherwise the mortgage document is invalid and the lender does not have access to clear title.
Technically it makes no difference if you are applicant or guarantor it will need to be disclosed when applying for future funding.
Banker
Banker, yes i agree in that case – but if just one on title there is no sense in adding another name to the loan as this will entail giving a guarantee and needlessly doubling risk
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
itsandrew wrote:My wife is looking to take out a LOC against our PPOR for running her business. Our PPOR is in joint names. Because of this the bank wants both our signatures on the LOC for her business.However, the sole purpose of the debt will be to run my wifes business:
1) Does it matter for tax purposes that the security for the business LOC is in joint names?
2) Does it matter for tax purposes that I will be a signatory of the loan, ie. does it mean my wife can only claim 50% of the tax benefit if my signature is on the loan?
Terry is 100% correct, if title was in one name avoid guarantees where possible.
In this example refer to options I listed above as the title is in joint names.
The tax benefits of the interest relate to who borrows, not who provides security.
Therefore you’re better to have the line of credit for the business in her name only. You will have to provide a guarantee as you are on title. If you do not provide a guarantee the property can not be used as security.
Answer to your questions;
1. Security is irrelivant. Purpose of funds dictates tax benefits.
2. If you are guarantor you will not be a signatory on the loan or account. You will only sign a guarantee document (you will get a copy of the loan or line of credit but not be requiredto sign it. As you are not a borrower. Your wife will sign her loan contract but not get funds unless you sign the guarantee.Note;
ideally, the line of credit would be in the company or business name however this might put the rate up as it becomes business banking. To avoid business rates you will need to apply for “funds for personal investment”.
None of the major banks are allowed to offer a retail line of credit for business purposes. I’ve seen many bankers fired for doing this and recently some brokers have had accreditations cancelled. It has not been enforced inthe past but is being taken more seriously now (loans must be not unsuitable under new laws). Hence business purpose requires business product.
Saying that. I would take a retail line of credit for personal invesmtent because I like to change my mind. Might buy some share or property. Bugger it- a month later use it for business.
It is the purpose of funds at time of application that matter.
If I was a banker and you said it was business. I would decline a retail line of credit and only offer a business overdraft or loan.
Fine lines. Step to the left it’s cheap. Step to the right it’s not!
Banker
If the title is in two names I wouldn't bother with the guarantee, but get the loan in both. you can then on lend the money to the wife or to her company. same rate as you are charged by the bank. Net result is the wife or her company can claim the interest.
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
The loan is still for business purposes. Regardless of strucuture.
Therefore if a retail product either you, your banker or your broker is will need to withhold information from the bank to get home loan pricing. It is a pretty minor area of fraud and very common; but still deceptive.
Some non-banks are happy to lend on home loan products for business purposes. Major 4, St George, Suncorp, Bankwest, BOQ and many others absolutly, unconditionally do not allow business loans to be written under retail products.
As mentioned above it can be disguised as personal investmet however if I knew th purpose I would decline it. I would only approve it on a business product.
To avoid minor fraud. Ask the bank to disclose to credit the fact the funds will be used for business. See what happens !
Hmmm, very interesting. I appreciate the comments.
Fraud – we have already spoken with the banker and they are in full receipt of the facts so I cant see how that is relevant in my case. It has all been fully disclosed.
There also seems to be two schools of thought:
1) loan in wife's name, me as gaurantor.
2) loan in both names then jointly onlend to the wife. Do you need a separate contract to do this?
3) Loan in both names, then onlend my half to my wife? How does that work? Do you need a separate contract?It's a little confusing but I think I picked out all the options discussed.
Andrew
itsandrew
Go as far as you can see and you will see further.
You should probably talk to your accountant, but i would think option 2 to be the easiest – subject to you disclosing the purpose to the bank. make a diary note that you have told the banker this in case something happens in the future.
You might need a simple loan agreement as evidence to the ATO – but it is unlikely they will be too fussy on something like this between spouses.
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 Andrew,
I know I’m being a little bit of a pratt however it’s very black and white and applies to all major banks.
Terryw wrote:You should probably talk to your accountant, but i would think option 2 to be the easiest – subject to you disclosing the purpose to the bank. make a diary note that you have told the banker this in case something happens in the future.Diary note is a good idea. if the bank offers you a home loan : investment loan; the banker has dressed it up as personal investment. End of storey.
Problem with the major banks is that business purpose loans are outside of retail bankers delegation. If purpose of funds is business neither the banker, retail credit officer, branch lender or mobile lender has relivant authority to write the deal as a home or investment loan. It is the same accross the board as it comes down to issues with APRA and banks requirements to catergorise their balance sheets.
Banks are split into multiple companies. E.g. Nab has a retail bank, business bank, capital markets, corporate etc etc. The all come under the one group known to us as National Australia Bank.
Which bank are you dealing with?
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