Home Forums Money matters Sole Trader to PL – Existing business loans

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  • #1000027
    ryza82
    Member
    • Total posts: 2

    Hi all,

    I have a tricky situation relating to an existing business loan i have in my ST entity which technically doesn’t trade anymore or receive income. Is it possible to simply transfer the liability over to the PTY entity so it can repay the loan? The issue i have is that i personally cannot make the repayments for this loan. The company receives all revenue from the business activities and i draw a wage. Not really sure how to deal with this. If the company went and made the repayments, would it be classed as me drawing income from the company? I fell like changing to PTY has been a major mistake due to this issue.

    Any advice would be much appreciated.

    #1222372
    Jason at KAA
    Member
    • Total posts: 6

    Hi rzya82,

    It was the right decistion to re-structure your business into a company structure as opposed to a sole trader. Some of the reasons as to why is that a company structure offers better asset protection and better tax rates for you.

    In responding to your issue, transferring the asset to the company will incur stamp duty so this is not recommended. It is not necessarily the case that if the company was repaying your loan that it would be classified as a wage to you. It can be structured as a “loan” which will have minimal tax consequences.

    You should seek assistance to your accountant/ tax advisor which should be able to assist you to advise and implement the most beneficial/cost effective method for you.

    If you like, we can conduct a full scope of work and offer a value-add proposal for you and business. Let us know what your thoughts on this.

    Feel free to reach out to me if there’s anything I can further assist you with.

    #1222373
    JamesMillar
    Participant
    • Total posts: 1,676
    Jason at KAA, post: 268657, member: 116132 wrote:
    Hi rzya82,

    It was the right decistion to re-structure your business into a company structure as opposed to a sole trader. Some of the reasons as to why is that a company structure offers better asset protection and better tax rates for you.

    In responding to your issue, transferring the asset to the company will incur stamp duty so this is not recommended. It is not necessarily the case that if the company was repaying your loan that it would be classified as a wage to you. It can be structured as a “loan” which will have minimal tax consequences.

    You should seek assistance to your accountant/ tax advisor which should be able to assist you to advise and implement the most beneficial/cost effective method for you.

    If you like, we can conduct a full scope of work and offer a value-add proposal for you and business. Let us know what your thoughts on this.

    Feel free to reach out to me if there’s anything I can further assist you with.

    I going to have to take an opposing view on some of these comments.

    1. There is insufficient information in the opening post to determine the best structure in this case. It’s true that companies offer a degree of asset protection (at times undermined by personal guarantees anyway) but they do not necessarily offer a better overall “tax rate” or tax outcome. As a matter of fact in some cases the short term outcome may produce more tax in a company structure as opposed to straight sole trader. There are a range of factors not stated above that would have a bearing on any recommendation. If the business profit was say $50k the tax bill would be around $8k as a sole trader end of story. If however that $50k profit was in the company the company tax would be closer to $14k in the short term with a potential to return some of the company tax as franked dividends in a subsequent year (with a possible partial refund if circumstances were unchanged. Moral of the story is that over time a company will generally put you in the same position as that of a sole trader when your income levels are consistent from year to year. The company only offers a deferral opportunity which can certainly be valuable in some cases but not all. We also don’t know if this income is PSI in which case it would be attributed back out to the individual to put them in the same position as a sole trader – with the added cost of running a company (not insignificant).

    2. The post discusses transferring a liability he has not an asset he has. Big difference. Stamp duty has no relevance here.

    3. Transferring a liability to the company would simultaneously create a loan that the individual poster owes to the company (and asset on company balance sheet). This loan may be effected by division 7A as a debit loan which can create complications.

    4. In short the opening post was correct in saying that repayment of this personal loan by the company would create drawings which will create tax issues.

    5. This matter could be professionally resolved in no more than one hour. Yes there is a cost but a full scope proposal for what is likely to be a straightforward small business setup is unnecessary in my opinion.

    6. It sounds like you may have setup this entity yourself which as you are finding can be a completely unnecessary and costly mistake. The added costs of reporting in a company really add up so there needs to be a clear benefit PRIOR to going down this path. $500 in advice could have saved you thousands.

    There is still not enough information to diagnose your situation and make an optimal recommendation but hopefully this has given you some insight.

    Best of luck

    James

    #1222374
    Jason at KAA
    Member
    • Total posts: 6

    James is right and has made valid points on this topic. With the lack of information gives multiple possibilities.

    By conducting a full scope of work/value-add proposal, it presents opportunities to identify other issues/ potential risks/exposures (not just this concern/issue) that may not only impact the business but the group as a whole, from a financial, taxation, funding and legal standpoint – In line with financial objectives and goals.

    Acknowledging that a sole trader operation less expensive than operating under a company . However, in most cases, a company structure does offer benefits that overweigh its initial and operating costs. Generally speaking, if you are looking to grow and run successful business as others, a sole trader operation may not be the best option just because it’s cheaper.

    #1222375
    HillgroveAH
    Member
    • Total posts: 2

    Its most likely the conditions your lender has imposed on the loan you have in place don’t permit you to assign that debt to another borrower (although the lender typically does have the right to sell your loan to another party)

    That being said, it’s in the interests of the lender to re docuemtn the loan with the new entity as borrower, albeit they may not make the process simple.

    Agree though with the posters above more information would be helpful; including who the loan is with.

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