Interest deduction on Loan to Family Trust (Discretionary Trust)

Discussion in 'Introductions' started by Chirping_bird, 6th Jun, 2023.

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  1. Chirping_bird

    Chirping_bird New Member

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    Hi Guys
    Situation is like we are buying a land under family trust and will build the house. as soon as house is completed, we will be selling a year later. We are having shortfall from the bank as a result I have to contribute some of my personal saving offset money into trust.
    I am looking for more tax effective approach here:
    1. If I lend money to the family trust then trust will pay some interest back to me which is going to increase my personal marginal tax rate which I do not want.
    2. Secondly, if I can lend money to trust at no-interest, is it possible if I can still add interest to the cost base of the property.
    3. Can all these interest cost be added to the cost base of the house during selling for a profit a year later.
    Basically, whatever means I lend or gift money to the trust, Is there any way to claim back interest on that money.
    This is first time investment under family trust
    Thank you
     
  2. Trainee

    Trainee Well-Known Member

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    If its coming out of your offset, then you would pay more interest, yes?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    no/. That is like a vegetarian eating grass fed steak

    It is likely to be taxed as revenue. If there is interest incurred by the trust it could be part of its cost base expense.
    Yes. You can claim the interest if you enter into a written agreement with the trustee and you borrow the money. None to claim if you don't borrow.
    The trust can claim interest it incurs if it borrows to produce income or if no ordinary income it would be a cost base expense.
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    1. If I lend money to the family trust then trust will pay some interest back to me which is going to increase my personal marginal tax rate which I do not want.
    If you borrowed the money and onlend at the same rate you would have income AND a expense to deduct. The effect would be $0 personally where both are the same and a deduction for trust. (Read below). If you dont do this properly then the shortfall of funds would be treated as a loan with no interest.

    2. Secondly, if I can lend money to trust at no-interest, is it possible if I can still add interest to the cost base of the property.

    No.

    3. Can all these interest cost be added to the cost base of the house during selling for a profit a year later.
    IF the trust has a lawful obligation to repay you based on a loan agreement then the interest is not tax deductible since the property build is aprofit making matter and all costs will roll into the HOLDING COST of the property. However if its informal etc then this wont happen. It wont be part of its costbase as thats a CGT concept but its much the same thing. Sale of property is a revenue activity not a CGT matter and in this example a isolated profit making activity. All costs are deferred and matched against the net sales (after GST is excluded from the sale and the costs) to calculate profit etc. This would lower the profit (or create a loss)

    These issues should really be given tax advice along with the GST issues.