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If I were to setup a company to lend myself money to finance a rental property at an excessively high interest rate so that I could claim the interest as a tax deduction, what implications would this have in legal areas.
eg. if I earn 150 000 per year, and my company abc pty ltd lends me 1$ at 150 000%, will I be breaching a law like arms-length transactions?
thank you in advance
In short, yes. If you can make an argument as to why the interest is higher than normal (unsecured, short term etc) then you may be ok. 150,000% is probably a bit excessive, though.
this sounds like a scheme to avoid tax, so the ATO can apply Part IVA of the ITAA 1997 and disallow the deduction.
If you try to keep it commerical, then it may be more likely to get thru. As Dan mentioned, if the loan is unsecured, then it may be commerically justifiale to charge higher rates, possibily similar to what a credit card comapny would charge. This would increase your deductions and move income to the company, capping it at 30%. May work out well if there is a discretionary trust in there somewhere it may work out better too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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