Debt Recycling with discretionary trust

Planning to set up a DR strategy with my PPOR and a LOC (master limit). But looking at integrating under an existing discretionary trust with corporate trustee.

I just wanted to make sure I have understood the tax situation correctly in the context of formally lending money to the trust vs not formally lending money.

Would be great to understand if I have completely misunderstood the arrangement.

Will seek professional tax advice, but would like to be an informed consumer.

Here is my understanding
Wife and I loan money to the trust at the LOC interest rate through a formal loan agreement. Our PPOR is not held in the trust. Will avoid this so that we retain the capital gains exemption for PPOR.

The trust then deducts this interest as an expense before making any distributions from dividends. If the trust makes a loss (dividends are less than interest), then the loss is contained in the trust and carried forward to subsequent years

we need to be aware of the trust making a loss but then having an income for tax (accounting?) purposes. If we are heading down this path, then we could sell some shares to avoid this situation.

What Iam confused about
If we do not do the formal loan agreement with the trust, I don't see how it works. I'll do an example.

• Wife and I gift the trust $50,000 using our LOC
• Our interest cost is $2,500 over a financial year
• The trust earns us $3,500 over the same financial year

We decide that the $3,500 should be paid to me as I am in a lower tax bracket.

Do I claim 50% of the loan interest as an expense? So my income for tax purposes is:
My income = $3,500 - (50% × $2,500) = $2,250

So the other half of the $2,500 interest is not claimable by my wife. Or can she offset this against her PAYG income or carry it forward?

Or can I claim the full interest? I.e. $3,500 -$2,500 = $1,000?


Hope my question makes sense!

 

Have you sought legal advice.a trust is not a legal entity but a relationship so you can't lend it money. If the trustee is different to the lender you can lend the trustee money. If the same you can't. I have a private ruling application in about claiming interest as trustee for a loan like this.

Why use a loc?

If you gift you cannot claim interest and neither can trust

 

Hi Terry,

No haven't sought legal advice yet, doing my background research. I have someone in mind to engage, but apparently they are not taking new clients

I think I have used some incorrect terminology, which has confused things. Just to clarify:

It will be money to the trustee, not the trust - my apologies. The trustee is a corporate trustee and the loan for the PPOR will be under my wife and my name's. Assume there is no issue there?

Gift is the wrong verb for that sentence, we loan the trustee the money with the expectation of getting paid back. If we don't do a formal loan agreement, is the money lent claimable 50:50 by my wife and me or can 100% of the interest be claimed by one person

 

Sorry forgot to add, LOC because it seems the easiest to implement.

By LOC I mean a AMP Master Limit Style product.

I was leaning towards initially splitting the loan into some $50k elements, paying those elements then drawing them down. But my assumption was that split would remain P&I and not be IO without refinance and I wanted to avoid refinance everytime I went to draw down a split. Happy to be corrected though - would.love to know if you can have the main PPOR loan PI and the split IO without too much hassle

 

No neither.

 

changing a split from PI to IO would result in a reassessment.