Benefit From Unlikely Ally

Sun Herald

Saturday June 22, 1996

DAVID POTTS

THE bad old days of having to mortgage your home to get working capital from the banks for a small business have suddenly turned good - and the unlikely people to thank are at the Australian Taxation Office.

While the banks are more interested in security than cash flow, they are becoming more flexible about how the rules are applied. This is because the Tax Office has confirmed that small business proprietors are allowed to repay their personal loans first without losing the tax concessions on their business borrowings.

This has already prompted Austral Mortgage to introduce what it calls the Wealth Optimiser loan which in effect has two accounts: one for your normal mortgage and one for an investment loan.

The trick is that all your repayments for both loans initially go towards the home mortgage only, because the investment loan interest is tax deductible. When the mortgage is paid off - usually in four or five years - all the repayments (still at the same level) then go towards the investment loan.

In the meantime you've collected tax concessions which, over a 25-year period on a $150,000 investment loan, will save about $70,000.

Advance Bank last week introduced a similar loan, called Accelerator, for its small business customers.

The idea is for small businesses to pay off their home loans with the profits from their business.

Like the Wealth Optimiser, this accumulates valuable tax deductions which on a $150,000 15-year mortgage, with annual revenues of $200,000 and taxable income of $50,000, would save up to $50,000.

The beauty of the Accelerator is that the benefits go straight to a business' bottom line.

For example, on gross revenues of $100,000 and a net profit of $6,865, the Accelerator would save $3,584 after tax a year. In other words, net profit goes up to $10,449.

That's the same as a 6 per cent a year increase in sales for doing nothing. And, for that matter, without the risk of bad debts.

The bank says you should use most of your business revenue to pay off the home loan, and then open an overdraft, secured by the mortgage, to pay for day-to-day business expenses.

This gives the account some flexibility as the overdraft can be drawn upon as needed.

As well, interest on the overdraft can accumulate without the bank requiring a minimum repayment (up to the credit limit). This interest remains a tax deduction.

At the same time there is a minimum monthly payment required on the mortgage side of the account, although even this is designed to cover just the interest which is not a tax deduction.

The bank's interest rate is 9.35pc for the home loan and 10.4pc plus a line fee of 0.5pc for the business overdraft.

It says it has "a written opinion from KPMG and a verbal opinion from the Australian Tax Commissioner that the structure offers a sound mechanism through which non-incorporated small businesses can manage their affairs."

The business must be a sole trader or a partnership.

To be eligible you must also have 25pc equity in your home or other collateral to that amount and a mortgage of at least $70,000.

The Accelerator is best for:

* High gross receipts, because the home loan can be paid off faster and

* Those on a high personal tax rate.

It is of least benefit when you have only small deductible business expenses.