It is a common tax planning strategy for a business owner who uses the family discretionary trust as a preferred business structure to distribute business profits to a private company vehicle, commonly known as “bucket company”, to take advantage of the lower company tax rate at 27.5% rather than paying tax at a higher marginal tax rate applicable to individuals. Under tax law, these profits are required to be physically paid to the bucket company, which can then provide loans to the business owner, including family members and related entities on strict lending terms. 

In the past, the major banks have provided loans commonly known as Limited Recourse Borrowing Arrangements (‘LRBAs’) to self- managed super funds (‘SMSFs’) to assist in the purchase of commercial and residential investment properties. Nowadays, it is well known that they no longer provide such funding to SMSFs and hence, loans can now only be sourced from one or two some smaller banks and second-tier lenders that remain in the market for provision of such loans.  

Alternatively, funding strategy worthwhile considering which can assist a cashed-up small and medium-sized business owner to buy an investment property is to loan funds from the bucket company to the SMSF under LRBA strict terms and conditions, which include a written Loan Agreement, maximum term of 15 years, interest rate of 5.94% applicable for 2019/20 year, maximum loan to value ratio of 70%, registered mortgage is used as security over the property, and monthly principal and interest repayments.

Notwithstanding the tougher lending conditions for SMSFs, it is worthwhile considering, as an alternative strategy, whereby you may have an investment vehicle that has lots of cash in it and the best it can earn from a bank term deposit is 1-2% which is the norm nowadays.