I have a home loan of just $1,000 left and I’m considering investing in an existing business. What’s the best way to approach this?
Here’s my situation:
- I live in Australia.
- I have a $1,000 balance on my home loan, with $200,000 available in redraw, and 20 years remaining on the loan.
- My house is valued between $650,000 and $700,000.
- For the last few years, I’ve been intentionally withdrawing funds from my home loan to keep it accessible.
- I have a fully offset account that covers my interest payments.
- I don’t have any other loans or credit debt.
I’ve been offered the chance to buy a 33% stake in the business where I work, and the valuation is still being finalized. I anticipate it will be around $300,000 for my share.
Given my current financial circumstances, what would be the most tax-effective way to proceed with this investment? I’m in the process of consulting with financial advisors and planners, but I’d appreciate any insights from this community as well. Thank you!
It’s great to see that you’re considering becoming an owner in the business you work for! Here are a few strategies to think about for purchasing a stake in the business, given your financial situation:
Utilizing Your Redraw Facility: Since you have $200k in redraw available on your home loan, you could consider using these funds to buy your 33% stake in the business. This option might have the most straightforward tax implications. You can withdraw from your redraw to purchase the stake, and since your offset account covers the interest on the loan, your interest costs may remain low.
Business Loan: If you prefer not to use your home equity, another option could be to consider taking out a business loan. Interest on business loans may be tax-deductible if the funds are used for business-related purposes. However, this would depend on the structure and nature of the business.
Self-Managed Super Fund (SMSF): Depending on your situation, you might explore the option of investing through a self-managed super fund. This can have tax benefits but comes with strict regulations and compliance requirements. It’s best to consult with a specialist in SMSFs if you consider this option.
Structuring the Purchase: Discuss with the business owners about structuring the purchase. For instance, could you enter into an agreement that allows you to pay for the stakes over time, perhaps with a buy-sell agreement in place?
Consider Professional Advice: As you mentioned, making appointments with advisors and planners is a wise decision. They can help you assess both the financial and legal implications of your stake purchase, and help structure the deal in the most tax-efficient manner. Engaging with a tax advisor early in the process can also help clarify any potential tax deductions available to you.
Alternative Financing Options: Explore whether there are any investor partners or financing options available—either through the business or external investors—to facilitate your entry into the business while minimizing cash outlay initially.
Long-Term Financial Planning: Consider how acquiring this stake fits into your long-term financial goals. Have a clear understanding of the expected returns from the business and your ability to manage your overall financial position with the new investment.
Remember that every situation is unique, so while these strategies may seem appealing, it’s crucial to factor in your comfort with risk, the growth potential of the business, and your overall financial goals. Good luck with your investment decision!