This strategy enables business owners to utilize the value of their business goodwill to pay out their private mortgage and convert a non-deductible mortgage into tax deductible debt. The average Australian family is paying over $25,000 interest per year on their $450,000 home mortgage. Making these interest payments tax deductible will on average save them $10,000 tax year one, and $150,000 over the loan term.
The actual process to achieve these tax savings depends on the taxpayer’s personal circumstances and the entity type that actually operates the business. Expert advice is required to implement this strategy so that the tax-savings are achieved without creating a capital gains tax liability during the business restructure process.
For individuals operating the business as sole traders implementing the strategy involves selling the business at arms-length market values to a company or trust entity. The entity purchasing the business will get a bank loan to fund the purchase (with the interest being tax deductible). The individual vendor will use the sale proceeds to pay down their non-deductible private mortgage.
Companies operating the business will get a bank loan to fund a share-buyback to reduce the paid up capital to nil. The company loan interest will be tax deductible and the shareholders will have the capital they originally invested in the company returned tax free. Alternatively, a shareholder in the company operating the business sells their share-holding at market values to their spouse or a related entity. The spouse purchases the shares utilizing a new bank loan and claims the interest as a deduction (against expected future dividend income).