It’s known as the Great Australian Dream, owning your own home. In the past this has been an attainable goal for most hard working people. However this is becoming less realistic today for people wanting to live in suburban Melbourne or Sydney due to the high inner city/suburb property prices. For growing small businesses, owning your own home by aggressively paying home loan debt is the quickest way to lose money and the dumbest thing you can do. We see it all too often here at Paris Financial and we need to straighten people out for a few reasons.
Firstly, your family needs to be earning a minimum of $200,000 from a small business to make this nightmare a reality. You see if your business is starting to earn this sort of money then you are starting to pay much higher taxes, especially if you withdraw the money to pay off a private mortgage with a bank. Generally speaking you will be paying 40-50% tax when you should only be paying about 20-30%.
We are brought up on the idea of the Great Australian Dream and this manifests itself in not only the man in the street telling you to pay your loan down as soon as you can, but many accountants and mortgage brokers will also tell you this. The usual line of owning your own home as quickly as you can is coupled with people advising you that the interest on your home is not tax deductible, unlike interest paid on an investment property which is tax deductible. This can be true for the salaried person working for a big company or a micro business running under a sole trader tax structure.
This is ludicrous advice for the growing small business owner.
You see if the excess money that would be drawn from your business to pay off the home loan either pays off a business debt or investment debt in the correct structure then the cash savings can be in excess of 20% depending on your circumstances. I’m not sure where you can invest these days to get that sort of a return on your money (because I am not a Wealth Advisor and so am not licensed to give financial advice). But, I suspect that putting in place an ingenious tax strategy to save this sort of cash is the best tax advice that you will likely ever get.
Yes, that’s right, around 20% is doable and possible.
A key part of this strategy, that is seldom shared, is when you draw money out to pay off your private home loan the tax paid on this money is gone forever to the ATO and your fellow Australians. A worthy place to send it indeed. However, if you follow our tax strategy, a fair proportion of the tax paid HAS NOT GONE forever.
“Where is it?” I hear you ask.
It is in a franking account.
“Did Frank someone make his mark and so they named it after him?” Is your next question.
No, the ATO called it Frank because they’ve marked this account as Company Tax paid in a small business structure and so not only does this money never have to be paid again but it may even be refunded to you one day – if you are structured correctly. And let me tell you, this franking account is paper gold especially for a rainy day in the future.
Our politicians over the last 20 years have really looked after small business with the changes in tax law, but people have to take advantage of them and structure themselves correctly. The laws are complex and as small business tax accountants we are continually updated month after month to stay abreast of this complexity. To keep it simple in growing small businesses with regards tax structures and loan repayments is stupid and complexity needs to be embraced. Trust in your Tax advisor is a pre-requisite.
In Episode 2 of the Great Australian Nightmare I’ll run through an example of a smart client willing to listen to their small business tax accountant and when the s#!+ hits the fan they were structured correctly. Counter to this I’ll give you an example of a dumb client listening to “the Great Australian Dream” in his own head and not listening to sound, complex tax advice. The difference is stark and it should help you understand that paying off your private home loan when you have a growing small business is indeed the Great Australian Nightmare.
Pat Mannix, Partner, Paris Financial