Discretionary Trust (Family Trust) - Corporate Trustee or in our Individual names?

My spouse and I have one investment property in our Family Trust which was purchased late 2017. After purchasing the investment property, the Family Trust was created before the settlement date.

We took out two loans to purchase this investment property.

One loan, which is against our own home for approximately for 500K is in both our personal names - we took out this loan in 2016. According to our accountant, for tax/investment purposes, this money was loaned to the Family Trust to purchase the investment Property.

The second loan which was the smaller loan was an investment loan and was made against the investment property for which the borrower for this investment loan is the Family Trust and for which the Trustee is us as individuals - there is less than 5K needed to pay off this investment loan.

Our accountant set up the Trustee of our Family Trust in our individual names rather than using a Corporate Trustee. Can anyone explain:

1. Is there any reason why the Trustee was created in our own individual names rather than using a Corporate Trustee?
2. Is it better to have the Trustee changed to a Corporate Trustee?
3. I have made enquiries to change the trustee of our family trust to a Corporate Trustee. Is it best to change the trustee of the trust to a Corporate Trustee before we lodge our very first tax return??

 

1. This is something that you should have received legal advice on at the time.

2. You should seek legal advice on this. It would generally be 'better' but it will depend on the structure of the company and the situation.

3. It will have no effect on the tax return so no need to tie it in that.

 

The loan to the trustee may be a legal issue in itself. So Fred and Mary lent money to Fred and Mary ? Is it a documented loan - Security etc ? The accountant could be wrong and ATO could deny all deductions if it considers that the $$$ borrowed was not loaned to the trust and the loan isnt maintains in terms of the agreement. Trusts can borrow without inteerst and parties can introduce funds to a trust and its not a loan.

One of the very basics of a request to setup a trust in such examples is NOT having the same parties who borrow from the bank who are also trustee/s. You cant lend to yourself. You cant contract with yourself. But you can personally lend to a company trustee and remove some concerns.

If the trustee changes how is this to be refinanced

 

Thanks for your reply Terry.
At the time we decided to set up a family trust it was a last minute decision and we were rushed to get things done before settlement. Furthermore, we were clueless and had no idea that a legal expert was required, nor would we have known who to turn to.

Terry is there a legal expert you could highly recommend in Melbourne who we could seek legal advice from?? Or, if we travelled to come see you, would travel costs and advise fees be tax deductible through our Discretionary Trusts tax return?

 

You raise interesting points.
Both houses have been used as security for the investment property.

I think in our case, Fred and Mary lent Money to the Family Trust itself, and not to the Trustees Fred and Mary. It could be that the accountant did say that we contracted with ourselves but maybe I misunderstood, or maybe he didn't elaborate properly. I need to find out. Do you know of anyone who is an honest, highly regarded legal expert in Melbourne that can help advise us???

 

The trust is not an entity but a relationship. At law a person cannot lend to themselves, but equity may recognise money has been used for trust purposes.

If in Melb try Nathan Yii lawyers.

 

The loan against our home was a personal loan and solely used for lending purposes for this investment property. Given we are the individual trustees of the Family trust, I am concerned that we should have had a corporate trustee.

I'm keen to be pointed in the right direction for legal advice on this matter

 

Thank you Terry! Much appreciated!

 

Who told you to use a family trust, and why did you do it if you didnt understand it?

Is the property negatively geared? How have you been claiming interest deductions?

 

We decided to use a family trust because I know of people who have family trusts and briefly looked into it re the benefits as opposed to buying in our own names. I thought that it would be a good idea having a trust considering that we plan to add more properties into the trust in coming years. I am no guru but I hope that I've done the right thing. I do intend to educate myself as time goes on. I've got to start somewhere right?

Is there any reason you may think using a family trust was a bad idea???

By negatively geared, do you mean if the trust is returning a negative return?? We are in the process of doing our tax returns, and from what I can tell the negative return and the interest deductions will be very small, if any. My aim is to get it positively geared as soon as we can.

 

where is the land?

The biggest draw back in NSW or VIC is the land tax.

 

The property is in Victoria and is currently being rented.
Which states have the lowest land tax?

 

You will pay higher land tax holding the property in a trust in Vic.

NT has the lowest land tax.

 

Using trusts may be a bad idea if you cant explain why you did it.

The trust took a 500k loan. Why wouldnt there be interest deductions in the trust?

 

I dont understand what this means.

 

Because Interest deductions are negated by the income received.

 

I followed this up today with the tax office and also a lawyer - they both said that our trust structure is correct and that the family trust can borrow money if the Trustee is an individual rather than a company. Which is exactly how ours is set up

 

I can't see the ATO saying something like this - it is legal advice that is not tax related.

An individual trustee can borrow money. But they cannot borrow from themselves.

e.g. Char as trustee cannot borrow from Char because at law a person cannot contract with themselves, even if a different capacity - you cannot sue yourself.

But if Char borrowed from a bank and used the borrowed funds for the trust this is different, the interest could be deductible to the trust because Char is the trustee.

 

Thats correct Terry, that's exactly what we did!