Am I getting too smart by a half?

I am looking at making a purchase through one of my Trusts (discretionary with corporate Trustee). Due to the lender requirements I must take out the loan in my own name - secured by the trust assets.

So - I borrow (say) $100k. Interest at 5% = $5k/pa.
I then lend to the Trust $100k.
The Trust generate income of (say) 5%. = $5k.

If I charge the Trust interest at 5% I have neutral income. The Trust has a $5k deductible expense(?).

If I dont charge interest to the Trust - is the $5k interest to me non-deductible? Or does the ATO view this as tax evasion/dodgyness? Or do I get $5k deductible cost - albiet the Trust has higher income.

What if I dont make a loan to the trust - but rather provide a cash injection?
Is the loan in my name deductible?

How do I make sure this is all legitimate? Or am I over complicating something which should be quite simple?

Blacky

 

I'd say no, because then your loan in your name is no longer for investment purposes.

Get a loan document written up between Blacky and Blacky Trust that spells out the terms.

 

@Terry_w

 

You mean the trustee of a trust which you are a beneficiary of is looking to purchase.

Doesn't seem like a commercial transaction. Take care with deductibility of interest.

No

You are under complicating it. You should set up a commercial loan written agreement or otherwise get a private ruling (or take a punt). Considered the other aspects? Estate planning, asset protection etc.

I must say that I have never seen a requirement like this before. Most lenders would be adverse to third party loans such as this.

 

How can the loan be in your name when you don't own the security?

I can understand/expect u guaranteeing the loan but this arrangement seems odd

 

My loan is in my name, i used the bank's funds to buy units and the trust used those proceeds to buy the property. This was for a unit trust though.

Hard to see why they'd do that for a discretionary trust though.

 

Here is my thread of this sort of thing with unit trusts
Unit Trusts and the 2 methods of Borrowing

 

Yeah that's unit trusts, this is a discretionary one

 

We did this for our US properties, we got lawyer to sort out document for loans. MTR is the bank who then lends to MTR trust @ 10%. My US/Australian account deal with the rest

 

Doesn't have to be 'commercial rates' (US)?

 

It is because "my Trust" (or as TerryW accurately describes - the trustee of the trust which I am a benificiarary of) doest currently own anything...or generate any income.

Therefore they want me to be the borrower, with security provided by the Trust(ee) (probably including a guarantee).

Estate planning/asset protection is the consideration for using the Trust. Trying to divest away from owning everything in my own name. Plus allowing me to distribute profits(loss) to other people/entities being secondary.

Just need to figure out the best way to go about to ensure Im not breaking any rules or raising red flags.

Blacky

 

Would prob find another lender would allow it and just have yourself as guarantor ?

 

It should be the other way around if discretionary. The trust is the borrower, you're the guarantor. Pretty standard stuff.

 

This is most unusual. I have never seen this happen. Who is the lender?

 

Westpac...

 

that might be why. Trust borrowers need to go through the commercial section of westpac, but maybe still treated as residential.

I would not proceed on this basis, but have the trustee borrow with your giving a personal guarantee.

 

Thanks Terry. I have spoken to other lenders who can probably do the deal, but are quoting a much higher rate (1-2% premium). Its not a huge loan I am looking at, so may still be worth while.

Cheers

Blacky

 

Westpac should be able to do it too, at same rate.

 

That does seem weird. You should just be able to do it in the Trustee/Trust with you giving a Directors Guarantee.