Legal Tip 272: Storing your cash in a Company or Trust Offset Account

Some people control companies or trusts which have purchased properties, with the trustee or company borrowing money to acquire the properties with offset accounts attached to the loan.

Sometimes these people put their personal money in the offset accounts of these loans so as to save tax. This can be a good strategy as it diverts income from an individual to a tax-advantaged entity.


Care should be taken to clearly document these transfers as loans. The dangers if you don’t is that you could be taxed on the withdrawal of the money (more so with the company) and/or could end up losing your money. With a trust the trustee also has a general obligation to keep trust assets separate to other assets.


Example

Toon sets up a company to hold property and gets a loan in the company name. Toon also has $200,000 cash and wants to place this in the company loan because outside of the company she will be taxed at a higher rate the income generated from this. So, she shoves it in the company offset account.



5 years later she takes it out and the ATO audits the company and her and taxes her on the $200,000 as a dividend.



Example 2

Pie does something similar but places her money in an offset account on a trust loan. Pie dies.

Pie’s legal personal representative is person A but the person now controlling the trust is person B. The estate is not able to get this money back and into the Testamentary Discretionary Trust set up in Pie’s will.


But it can work well with tax wise if properly documented. Similar to the strategy that I outlined at:

Tax Tip 232: Simple Tax Strategy to Increase Negative Gearing Tax Tip 232: Simple Tax Strategy to Increase Deductions


Example

Beep is on a high income and owns a negatively geared property and the spouse of Beep, who is on a low income owns a property separately. Beep also controls a discretionary trust which holds property and has an offset account on its loan.

The offset account on the spouse’s loan is full so Beep starts building up cash in his offset. This reduces his deductions and results in more tax being payable at 47%.

After a while Beep realises he could take the $200,000 cash from his offset and make an interest free loan to the trustee of the trust with it putting the $200,000 in the trust’s offset account.

If the interest rate is 4% this would divert $8,000 income from Beep to the trust. Beep saves almost $4,000 in tax.

The trustee saves $8,000 in interest which means it has $8,000 more in income. This income could be diverted to the spouse who might be on the pay $2,300 in tax and that generates $1,700 in extra income for the family – in the first year.


As always get legal advice, especially before transferring money to other entities as there are many other consequences as well as the ones mentioned above.

 

terry, can above work if the trust's investment property has no offset feature? Meaning, Beep pays
down the trust's loan by $200K which effectively also saves $8K of loan interest with which
the trust can then pay Beep's spouse as distribution from trust and lower tax rate?

Does it still make it a good arrangement?

I guess potential problem may be that if there is no redraw facility, then access to that $200K is
gone for Beep.

Cheers
FXD

 

Generally you shouldn't pay someone else's loan. But you could lend the trustee and if done properly the trustee could potentially later borrow to pay you back

 

The other scenario is that what if Beep has no IP but PPOR with mortgage & offset
account. Situation with Beep's spouse & the trust remain the same.

Assuming interest rate on trust's investment loan is higher than that of Beep's PPOR home loan.

PPOR IR @ 3.5% and taking out 200K from offset translates to $7K non deductible interest p.a.
IP IR @ 4.5% getting a 200K injection translates to savings of $9K which may be distributed to
Beep's spouse and the that money can still go service extra $7K of PPOR interest, plus more.

Am I thinking it right here or have I missed something?

 

You can debt recycle and debt shuffle into the trust to get tax savings and interest rate savings too

 

u mean "debt recycle & debt shuffle into ...." from/using non deductible debts/savings ?

 

You could pay down non-deductible debt and reborrow at cheaper rates and onlend to the trust

 

thought u said interest free loan to trust in you example above. If so, does it really matter to just
lend the cash (extra or from offset) to trust instead of pay down non deductible loan & reborrow?

 

Yes different outcomes get legal advice

 

Provided spare cash reserve available, the current situation seems justified to utilise such
strategy as IP rents default will happen inevitably. However, the intent & purpose may not be the
same as originally intended but more on reducing debt to mitigate risk.

In contrast to lenders repayment holiday with interests capitalised, not sure how ATO will treat the
tax deductibility going fwd. It's a big mess it seems. Any thought or view on this, Terry?

 

Yep:
Tax Tip 280: Loan Repayment Holidays and Tax Deductibility Tax Tip 280: Loan Repayment Holidays and Tax Deductibility

 

Thanks Terry.

If not claiming compounded interest every FY through tax return as a result of repayment holiday
resulting than higher loan balance, can the higher loan balance then be used as the new costs
base for CGT purpose when time comes to sell?

 

Ive covered this before as well:

Tax Tip 78: Capitalising Interest and Claiming it off CGT? Tax Tip 78: Capitalising Interest and Claiming it off CGT?

 

Depends if it's incurred properly too.