Incorporating a Trust into a Strategy Recycling Debt

From my experience Banks aren't fans of lending money to trustees against assets held in trust. The trustee being the borrower does not necessarily have entitlement to any of the income the asset generates. Being a discretionary trust the beneficiary is not guaranteed an income from the asset. Though as the use of trusts are becoming more common some banks are starting to come around to the idea of lending for assets in trust.

 

Hi @Terry_w

Sorry for digging up an old thread but I figured best to post my question here than create a new thread.

I'm looking to debt recycle and my plan is to invest a portion in shares through my disc trust. However from reading your post I can see 2 potential issues:
1) From OP and replies, looks like my trust would have to be corporate trustee. Currently I am trustee (set it up in a rush), so now might be a good time to change to corp trustee. I can't remember what my reasons were for wanting to change it corp trustee previously, but recall it was something I definitely wanted to do, so might as well pull the trigger.
2) My trust has a substantial paper loss already. If my corp trustee ATF Trust borrows say $100k from me and pays me 3% pa interest ($3k) this will create further losses in trust (which are stuck there for now) but will give me $3k extra income which I'll pay tax on - is that correct? So until I get my trust into a profit I'll end up paying more tax doing it this way

Thanks

 

Read my other post on why you shouldn't hd shares in the same trust as property. You would lose the franking credits for starters.

And a trust that only holds shares doesn't necessarily need a corporate trustee

 

would a discretionary trust that has an individual as trustee that makes a family trust election and nominates that same person as the test person present an issue ?

 

Yes

 

Which post, Terry? I can't see anything in this thread.

Setting up a different trust for shares would be quite expensive for the amount of shares I'm holding. Plus I've got losses in the trust so profits from shares will be offset against these losses...

I've already got $30k+ worth of shares in my trust (same trust as property trust) and have only owned them for a few months so would incur full CGT if I sold now to change over...

 

Sorry, another thread.
Trusts can distribute to each other too - I have a thread on this too. Sounds like you might miss out on the benefits of franking credits with the existing shares.

 

Why is that?

 

I think I can answer my own question here.

If I split off say $100k loan and loan this to corp trustee ATF trust, and corp trustee pays me $x pa, I then pay $x pa to bank so no extra 'income' for me.

Is this correct?

 

The trust can pass on franking credits if taxable income income is negative

 

Do you mean 'can't', Terry? Will the franking credits stay in the trust as 'losses' or will they be lost altogether?

I guess in this case I have 2 options:
1) Do a development in the trust to get it into +ve territory
2) Sell the shares (probably wait 12 months) so the profits wipe out some losses. Re-buy into shares in different entity

 

trusts that merely distribute from a profit trust to a loss trust without a commercial reason to do will probably be subject Part IVA even where they have made family trust elections.

I have a barristers opinion on how things need to be done where distributing from a profit trust to a loss trust. journal entries will fail the Part IVA test.

 

Terrific post Terry.

When the trust periodically sells the asset, I assume it distributes the ‘full amount’ (equivalent to original loan amount + any capital gain) back to the beneficiary, in order to accelerate as much as possible the recycling.

Is that trust distribution you mention not taxable in the hands of Millhouse and Lisa?

 

Can

 

Yes. Only income is taxed,

 

if the trust has no net income or makes a loss, the benefit of the franking credit is lost.

 

So, taking your original example, if they lend $100k to the trust by redrawing on their loan, the trust invests and gets 7% return, minus the 5% lending cost, it has $102k remaining.

It then distributes the $102k back to Millhouse and Lisa.

M&L will pay tax on $2k? (not $102k?)

 

Yes. That would be the income after expenses

 

remember as well the franking credits do not form part of the distributable income of the trust estate,

 

Thanks Terry. Absent the trust, if you redrew money, bought shares, and later sold the shares (all in your personal name), the proceeds from the sale would arguably need to be put towards the deductible debt. Having the trust in place fixes this it would seem.