Every year, business owners pay thousands more in tax than they need to — not because they earn too much, but because their debt sits in the wrong place.
The worst type of debt is non tax-deductible. However, there are often many opportunities through simple restructure that can save money every year without changing your lifestyle or taking extra risk. This article looks at a real example we helped a client with recently.
When families buy a new home or a holiday house, often the default is to borrow personally. That creates private, non-deductible debt because the lending is being used to purchase private assets that don’t generate income. Meanwhile a company can sit on retained profits and strong cashflow that could support borrowings where interest would be deductible. The banks generally care about security and repayment (serviceability), not who the borrower is. Whereas Inland Revenue cares about purpose and who the borrower is. Mix those up and you quietly burn cash and pay more tax then required.
The Principle
Interest is tax-deductible when the borrowing is for an income earning purpose (i.e., inside a business or for investment purposes). Security can be over personal assets, but the borrower and the use of funds drive tax deductibility.
The Case Study
To keep the maths simple, we are using round numbers and an abstract example.
Simon owns a profitable company. He wants to purchase a $600k property (let’s say a beach house) for private use. Although we’ve used a beach house in this example, the reality is that it could be any borrowings for private use (such as a vehicle, boat, etc).
Option One
Simon borrows $600k personally for the beach house. The result is that any interest on the loan is not tax deductible because he is buying a private asset that won’t earn any income. There is no tax benefit.
Option Two
Simon’s company pays a dividend to create or increase Simon’s shareholder current account (the funds that the company owes to Simon). The company then borrows $600k to repay that loan to Simon. Simon uses the cash to buy the beach house.
The result is that the company now has a $600k loan used for business purposes and the interest is tax deductible in the company.
This saves Simon $14k of tax every year!
Illustrative numbers
Company loan $600k
Interest rate 6%
Annual interest cost $36,000
At a 39% top tax rate this reduces total tax by about $14k each year.
The family still gets the same beach house. The business structure simply carries the debt in the right place.
Why this works with the bank
Banks generally look at two things. Security and serviceability. Security can be taken over the beach house and even the family home. Serviceability comes from the company’s profits. The bank does not need Simon to be the borrower for the beach house just because the security is over a personal asset. In some situations (and with enough serviceability and equity) the banks will provide an interest rate on residential rates even though the borrowing is in the name of the company.
How to implement this safely
(what we do for our clients)
1. Map your balance sheet
List company retained earnings, shareholder current account, existing loans, and planned personal purchases. Review the balance sheet and come up with a plan for any identified opportunities based on the current situation.
2. Document the flow of funds
Minute a fully imputed dividend if needed. Record the shareholder current account position. Prepare a loan purpose statement for the company borrowing that clearly links funds to the business.
3. Coordinate with your bank and lawyer
Ask the bank to lend to the company with security over agreed assets. The lawyer prepares security documents and handles any transfer of funds.
4. Execute the transactions in order
Dividend first where relevant, then bank lending to the company, then repayment of the shareholder current account to you, then you complete the personal purchase with cash.
5. Keep the paper trail clean
Board minutes, dividend statements, shareholder current account ledger, loan agreements, and settlement statements. This evidence supports deductibility.
6. Review remuneration levels and imputation
Ensure imputation credits are available. Plan any top up tax for shareholders at personal rates.
7. Recheck annually
Confirm interest purpose remains business related, security arrangements are current, and the numbers still stack up.
Common questions and fishhooks
What about dividend tax?
A fully imputed dividend carries 28% credits. If your personal rate is 39% you pay an 11% top up (5% DWT and a further 6% top up tax) Even after the top up the annual interest deduction can still leave you ahead. Often the extra 11% tax is inevitable anyway, you’re just brining it forward (yes, cashflow is a key consideration too). You may find this is a one step backwards, two step forward approach.Is this tax avoidance?
No, provided the borrowing genuinely sits in the business for business purposes and the documentation shows that. Security over a personal asset does not change purpose.What about residential interest rules?
This strategy does not rely on claiming interest against a personal rental. The deduction is taken in the company. You still need to comply with current residential interest settings for any rental activity you have elsewhere.What if the bank says no?
You’ll likely talking to the wrong person. If the bank will let you borrow the funds to purchase the property, they should also let you borrow in any entity you like provided they have the security and serviceability). A good broker can help.Do I need a trust?
A trust can help with asset protection and shareholding alignment, but it is not required for the core saving shown in this example.
Summary
This one change does not require you to earn more or spend less. It simply utilises the existing structure to put the debt in the right place. If done correctly it can save $14k each year on $600k of borrowing, improve asset protection, and keep cash inside the business working for you.
If you are planning a home upgrade, a holiday house, or any major personal purchase, let us model this for you before you sign bank papers. We will map the flow of funds, coordinate with your broker and lawyer, and deliver a clean, defendable structure that helps you pay less tax and get ahead faster.
Contact Us
Contact us today to discuss on 07 827 9130 or email us. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
