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Borrowing to distribute?

Discussion in 'Accounting & Tax' started by Cactus, 22nd May, 2016.

  1. Cactus

    Cactus Well-Known Member

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    @Terry_w @Paul@PFI or anyone else with knowledge on this, Can a trust distribute money other than profits?

    For example

    The Family Trust has a few IPs that have appreciated in value. Can the family trust re-fi the assets to create cash and then distribute that cash as a distribution to low income earning spouse to take advantage of the tax free threshold?
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Of course it can.

    Whether the interest would be deductible is another question entirely.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes it can. But various implications - is it capital or income for starters?
     
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  4. sanj

    sanj Well-Known Member

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    borrowing money against an asset is exactly that, a loan. there would be no tax payable and therefore no advantages of a tax free threshold from proceeds of a loan
     
  5. Cactus

    Cactus Well-Known Member

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    Yet if you don't have a loan agreement in place any loan from a corporation is Div7a income...

    What if spouse is an employee... Can trust borrow to pay wages?
     
  6. Cactus

    Cactus Well-Known Member

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    The distinction of capital would only be made when the assets sold though. As I'm a developer I will need to Keep the asset for quite a long time before it will pass the sniff test to be capital not income. How the loaned money is treated, well that I don't know.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Trust loans are not Div7A loans - generally.
    A trust could borrow to pay wages.
     
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  8. Cactus

    Cactus Well-Known Member

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    Good point. If paid as wages I would suspect it would be deductible, but if paid as a distribution possibly not.
     
  9. Cactus

    Cactus Well-Known Member

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    Wages may be the best route then as this would probably keep Deductibility of interest.
     
  10. sanj

    sanj Well-Known Member

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    we aren't talking directors loans from a business here, I don't think it's as stringent as what you're referring to.

    employee of what? if you're referring to a business that's owned by a discretionary trust then it appears you're mixing up rules and responsibilities at a business level vs shareholder level.
     
  11. sanj

    sanj Well-Known Member

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    from your first post it looks like a DT that holds investments, what sort of wages can the trustee company legitimately pay? it isnt a business with staff etc unless I've misinterpreted the situation
     
  12. Cactus

    Cactus Well-Known Member

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    It's a small property consultancy/developer.

    I am considering working as a salaried employee into the future for a few years. If I did I'd like to use the DT to take advantage of my spouse low income.
     
  13. Cactus

    Cactus Well-Known Member

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    I understand the difference. You suggested it couldn't be done. I was just stating that if it was a company the ATO would treat the payment as income not loan.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What work could your spouse do for the business?
     
  15. Rob G

    Rob G Well-Known Member

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    A mere asset revaluation and distribution is not assessable income to the beneficiary and the interest expense is not deductible to the trust.

    Under rare circumstances it may be treated as income to the beneficiary.

    Be careful that the interest expense does not put your trust accounting into a loss, ending up with no beneficiary presently entitled. This means the trustee is assessed on all net income at 49%, no CGT discounts on trust net capital gains, etc.

    It will require a detailed check of the trust deed and financial forecasts. There is also the issue with mixed purpose trust borrowings on a redraw etc.
     
  16. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Take care with paying a eligible beneficiary a wage from a trust. The ATO may consider this non-deductible and consider the amount a undistributed element of trustee assessed net income at 49%. The ATO could also assess wife on trust income too where a valid distribution is not made to her.

    This is akin to a partnership paying wages to a partner.
     
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  17. Cactus

    Cactus Well-Known Member

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    She can be an Project Administrator carrying out the correspondence to Property Managers, Paying of Invoices Bills, following up on progress of construction, council etc.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It may be possible, but just make sure you get advice and pay market rates.
     
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  19. sanj

    sanj Well-Known Member

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    So for your developments business is it a company with the shareholder being a DT with corporate trustee or is it just a DT /CT set up?
     
  20. wogitalia

    wogitalia Well-Known Member

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    Honestly, go see your accountant, you don't seem to have a fundamental understanding of how a trust operates and are skirting way too many audit red flag areas to just go and do this kind of thing.

    At a quick glance you've got potential Div 7a, PSI, non-deductible wages, capital vs income, private use loans and several other considerations that you're not going to have any peace of mind or reliable solution asking on a forum.
     
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