The Top six questions that I receive from business owners in the lead up to 30 June Tax Year End – Question #4

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

Short answer: No

Detailed answer: Any business or investment loan will attract interest. The ATO also expect that loans provided at non-arm’s length (i.e. by Directors/Shareholders and/or their family or friends) would also attract interest (ATO Benchmark Rate). Given this, it is the interest on the loan the is 100% tax deductible, not any principal repayments. Therefore, paying out a loan (i.e. principal) will not reduce your tax. The tax-effective strategy would be to pre-pay interest, which is something you could arrange with your bank. It brings forward interest and therefore increases your tax deduction and reduces your tax.

If you would like further clarification or have any other questions, please do not hesitate to ask us.

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Tony Dimitriadis