Debt recycling in a discretionary family trust

Long time lurker, first time poster. My question relates to implementing debt recycling in a family trust.

Private Assets
PPOR: 500k
Home loan 400k with 75k funds in offset.
I am the sole borrower.

Family Trust
Main purpose is to hold my husband's shares in his business
Shares 150k which is funded by a business loan (25k down payment and 125k outstanding)
My husband is the sole trustee.

With the above scenario is it possible to debt recycle 50k from the PPoR using the offset funds and then lend to the Trust such that the interest on the 50k is tax deductible for myself as I am a beneficiary from the Trust?

In terms of the final outcome does it make a difference if I make the loan to the Trust interest free vs at the same interest rate as my PPoR?

Many thanks in advance for your help!!

 

I have a tax tip on this topic

 

Thanks for your response Terry and I have looked up my query and realised the need for commerciality within the loan terms. Is this satisfied if I charge commercial rates for an unsecured facility - I understand my taxable income would increase (as the interest rate would need to be higher than what my PPoR charges) but the trust income would subsequently be lower as well so the distributions would be lower hence a net zero outcome.

However, I note you had a post regarding loans being made to family trusts and there was some discussion about related party transactions. In my scenario is it permissible to make the loan given I am the lender and my husband is the trustee?

 

Why did you use a personal trustee for the trust?

 

That was just how our accountant set it up - we didn't know any better at the time

 

You cannot claim the interest on the loan unless an arms length agreement. But then interest received is income.

But you can debt recycle with a trust incorporated.

Best to see a lawyer

 

Unfortunately the Trust was created to hold my husband's business shares and they require the Trust to be family/discretionary and do not permit corporate trustees. Are there any alternatives to facilitate debt recycling?

 

This doesn't make sense. Discretionary trusts can have corporate trustees and I have never seen a trust deed that doesn't permit a company to be trustee. You also imply that the trust cannot be used in a debt recycling strategy when this is unlikely to be the case.

 

Apologies I should have clarified my husband's business is a franchise and the franchisor permits the business shares to be held in a discretionary trust but does not permit corporate trustees.

Perhaps under a mistaken impression but I thought that's what you were implying. I was asking if it's possible for me to enable debt recycling without appointing a corporate trustee as that's not an option we have available.

 

Thats interesting about the franchise, but is no barrier to incorporating the trust into a debt recycling strategy.

See my tip, if you can't find it I can link it later when i get on my other computer.

 

Here it is, i just googled:

Incorporating a Trust into a Strategy Recycling Debt

 

Potentially personal services income issues. This is why tax advice is so important. Just because its a trust does not mean its a legal structure

 

Thanks Paul and Terry for your responses!

Which part were you referring to being a personal services income issue?

This was the original article that I read but a number of concerns were raised about related party transactions i.e. the person lending is the same person who is the trustee. That was the reason I wanted to clarify if there are still issues if I am the lender (and beneficiary of the family trust) and my husband is the borrower (sole trustee and beneficiary). It also wasn't clear if a family trust had additional or less constraints than a typical discretionary trust.

 

This is something that you need legal advice on, you cannot lend to yourself but spouses can lend to each other.

 

If the company has PSI issues then tax law may not allow a profit to be retained and paid to a trust.
The other issue is the legal contracting problem of ""My husband is the sole trustee.""

 

Thanks Terry that's most helpful.

I don't believe any PSI issues as my husband and his partners are paid a base salary (which is claimed under personal tax return as a normal employee PAYG) with the business profits then distributed as dividend under the trust and they aren't attributable to an individual's efforts. Let me know if I am misunderstanding what you mean about PSI