Question #4: Will I reduce my tax if I pay out my business/investment loan?

Hi, my name is Tony Dimitriadis, I run an accounting & advisory firm and I specialize in helping ambitious builders and property developers build a financially rewarding tax-efficient lifestyle business.

The fourth, most popular question I get asked in the lead up to 30 June is, “Will I reduce my tax if I pay out my business or investment loan?” Well, the short answer is no. But the more detailed answer is that any business or investment line will attract interest and ATO also expects that the loans provided at non-arm’s length i.e. by directors shareholders and/or their family, who also attract the interest at the ATO benchmark interest rate.

Now given this, it’s the interest on the loan that is 100% tax deductible if it relates to your business or investment. Therefore paying the loan i.e. the principal will not reduce your tax.

The tax-effective strategy would be to pre-pay interest on the loan and you can arrange this with your bank. It brings forward the interest and therefore increases your tax reduction, thereby reducing your tax. So paying the loan completely will not reduce your tax. Paying out interest or pre-paying interests will increase your tax deduction and therefore reduce your tax. So thank you for joining me. I hope you found this useful look forward to speaking with you soon. Bye for now.

Tony Dimitriadis