Can a trust have an offset account?

Hi all

Just trying to get my head around whether or not to purchase a $590k IP in a discretionary trust (which I have not yet set up).

I was thinking to have the trust borrow 80% ($472k) and then stick the remainder of my cash in an offset against this.

Being a complete trust newbie, it then dawned on me that perhaps the trust would then "own" my cash and would have to distribute it at the end of the year, which would expose it to tax again.

So how does a trust have an offset account? Can I own an offset in my name that offsets the loan of the trust?

Thanks
Ally

 

Not all banks offering offset account for trust

 

You should seek advice on the consequences of just putting your personal money into the bank account of a trustee too.

 

I see thanks Terry, I most certainly will. There is clearly more involved with this than I thought. I had assumed I could lend the money to the trust with me as either the trustee or the sole director of the corporate trustee.

My thinking came unstuck when trying to work out how a trust could hold my money in an offset acc without distribution (or highest marginal rate taxation).

Thanks
Ally

 

Thanks very much Rolf. That makes sense re the name of the loan, but can a discretionary trust hold these funds in the offset without requiring distribution each year?

Thanks
Ally

 

Not sure what you mean. A trustee could borrow money and keep that money it a trust bank account including an offset account without needing to distribute it - it is not income.

But if you are both the lender and the borrower (trustee) then the question is can you contract with yourself?

 

Yes it could be possible.

 

Ahhh I see thanks Terry that is the lightbulb moment for me, the trust is borrowing the money that is in the offset account, as well as the money for the deposit on the IP.

Good question about contracting with myself, I suppose a corporate trustee would add a different individual to the equation wouldn't it?

Ally

 

Do lenders take this loan into account when determining borrowing capacity?

 

Yes. If it is declared properly it would be a debt.

 

Trusts also have to worry about the usual issues with borrowing money and parking in an offset. Tax issues such as deductibility of interest and mixed loan issues.

 

Trusts are generally treated as an extension to personal borrowings in resi lending - so they'll need to be taken into account and vice versa for borrowing within the trust, your other personal liabilities will be taken into account.

As others have mentioned - offset accounts are definitely available for trust lending, as always its a case of picking the right lender who will take the type of trust and allow offset facilities.

 

So is it better for servicing purposes that cash be injected into a trust as an equity contribution (rather than as a loan)?

 

Yes. Better from a servicing pov. But it all depends on the source of the funds. If the person behind the trust is borrowing the funds and they are giving or lending it should work out the same if they are the person giving the guarantee.

Of course many would not declare the loan to the bank but this could come back and bite someone's arse if there is some sort of dispute as this could be used as evidence that there was not loan.

 

I see, but if you were injecting cash into the trust and there was no loan this would be worse for servicing? Is that because the borrowing capacity of the trust is maintained (no loan)?

I've read in one of your Tax Tips Terry that it is sometimes an option to use cash as a security for a loan in order to borrow deposit plus costs. In light of the above discussion, wouldn't it be preferable to simply loan the trust the cash instead of involving banks/term deposits etc and tying up the cash?

Ally

 

If you have cash and loan it to the trust the trust has a debt which must be taken into account when assessing serviceability.

If you gift the cash to the trust then there is no debt so it wouldn't affect serviceability.