Transferring loans

Our Experts Answer:

A restructure of debt like this can have tax avoidance and genuine deductibility problems as there is no automatic deduction for interest on a debt owed by a LTC. The IRD's position is that interest is only deductible to the extent that the loan refinances genuine "contributed capital" lent by the shareholder. For example, if the shareholders loan has been bolstered by distributing a tax free dividend from an unrealised revaluation reserve, the refinance of this portion of shareholder loan will give rise to non-deductible interest.

It may be legal to have the company hold the debt and the bank may agree given they will have cross collateral security arrangements over both. But if you are motivated by trying to gain a legitimate interested deduction, the limit will be the extent to which you can refinance the shareholder loan account that represents money actually lent to the company without tipping the shareholder loan into a debit balance.