NSW Division 7A loan repayment

[TTS]

My wife and I own two private companies. Company A has operated since 1979 in the same line of business. It has retained profits in excess of $3M and available franked dividends of $1M. Company B was incorporated two years ago and hasn't traded.
My wife and I owe Company A $2.2M via a Div. 7A loan, which is due for repayment soon. I propose the following method of payment:
My wife and I raise $2.2M via a mortgage over our property. We lend that money to Company B. Company B then buys the shares in Company A from my wife and I for $4.5M, the value of the balance sheet. It makes a down payment of $2.2M and enters into an agreement with my wife and I to repay the balance ($2.3M) over a period of 10 years. My wife and I use the down payment to pay out the Div. 7A loan from Company A. Company A lends the $2.2M to Company B (which now owns Company A). Company B repays the loan from my wife and I ($2.2M), and my wife and I pay out the mortgage to the lending institution.
Going forward, Company A continues to trade and earn profits, which it pays to Company B as dividends. Company B uses this income to make repayments to my wife and I for the amount still outstanding on the share purchase. It also pays interest to Company A for the $2.2M loan.
Can you please advise whether the above series of transactions is a legal way to deal with the Div. 7A loan?

 

[Malcolm Burrows]

Of course you will need to talk with an accountant and get legal advice. That said as soon as you start buying and selling assets you are likely to run into capital gains tax problems.
The terms of the initial division7A loan are also important as this could be important. If Company A has retained earnings you could offset some of the Division7A by the payment of a dividend to the shareholders - presumably yourself.
I don't understand why your wife would not just repay the amount of $2.2m from the loan over the unencumbered property? Then start on the process of paying franked dividends to repay the loan to the bank.
In short there seems to be a few other considerations. Here is a link to an article about division 7A Loans - hope it helps

https://www.dundaslawyers.com.au/division-7a-itta-1936-cth-compliance-consequences/