New-style Loans Target Small Business Owners

Sydney Morning Herald

Tuesday July 2, 1996

By ANNETTE SAMPSON

SMALL business owners and investors are being targeted by new loan vehicles which try to marry the desire of these groups to pay off their home loans as fast as possible with their aim of maximising the tax breaks on their investment or business income.

Mortgage manager Austral launched its Wealth Optimiser product a few weeks ago (Money, June 19) while Advance has now come on to the market with its Accelerator loan.

Advance's head of public affairs, Mr David Brown, says the Accelerator is targeted at sole traders and husband/wife teams operating a business as a partnership, although they could use the loan for investment purposes.

It consists of two individual accounts - a residential loan and a business overdraft - to which a global borrowing limit applies.

The gross receipts of the business are directed towards paying off the mortgage while the business borrows money for its day-to-day expenses from the overdraft. A separate third account exists for personal, non-deductible expenses.

The aim is to minimise non-deductible interest by increasing deductible interest. This is done by trading off accelerated payments on the home-loan account with an increasing business overdraft, the interest costs on which are tax-deductible.

The Accelerator is a secured loan against the property and has all the caveats of other secured loans for business purposes - principally that you could lose your home if your business fails.

It has a 75 per cent loan-to-valuation ratio and current interest rates are 9.35 per cent for the home loan portion and 10.4 per cent plus a line fee of 0.5 per cent for the business overdraft.

Mr Brown says the Accelerator loan also has non-tax advantages. It allows for better cash-flow planning and budgeting, and more flexible management of private and business affairs. Advance has an opinion from its tax adviser, accounting firm KPMG, that the structure is acceptable for tax purposes and also has an opinion from the Tax Office to this effect (though tax opinions, unlike private rulings, are not binding).

As the ultimate test will depend on individual circumstances and what the loan is used for, it is recommended potential borrowers seek their own tax advice.

Austral's Wealth Optimiser splits borrowings into two or more accounts and accelerates home-loan repayments in the early stages while interest on deductible borrowings is capitalised.

For an investor on the top marginal tax rate, with a $250,000 loan - split $100,000 home loan and $150,000 investment loan - Austral managing director Ms Vicky Edema says savings of more than $140,000 can be made over 25 years. (These are additional over running separate standard home and investment loans). This assumes the borrower is on the 48.5 per cent marginal tax rate, and an interest rate of 9.95 per cent applies to both portions for the full 25-year term.