Lending at a rate lower than cost of finance

So if a trust owns a company, can the trust lend to the company at a rate that's lower than it's cost of funds? E.g. trust borrows at 5%, lends to bucket company it owns at 3%. Can trust still deduct its interest loss against its income?

It's like buying a negative geared asset.

 

Yes it could lend.
But any deductions would be limited to the income received or less.

 

Thanks - but then on the same line of reasoning, when we buy negatively geared property in Sydney, why isn't the interest cost limited to the rent it produces?

 

Why? Because .Bill is not PM. If he was then you would be limited.

A trust can't distribute losses. Just carry them forward.

 

Sorta incorrect. Trusts can distribute a loss. Incl disc trusts and unit trusts and hybrid trusts. Its a complex issue and often missed by some accountants. When known it is a powerful strategy.

Think of a trust that has a rental property. It has accumulated losses of say $100K. Eventually the trust disposes of the property and produces a CGT profit of $500K. In the same year the trust has a net loss from rental of $20K. The trust is a fixed trust for simplicity and there are two unitholders (each 50%)

The trust will have Net Trust Income of $130K. ($500k x50% less $20K rent loss less $100K c/fwd losses). But the trust will distribute two elements of income in total
1. A Discount CGT amount of $250K (The trust shows half the sum) and
2. A trust loss amount of $120K
Each beneficiary will receive trust income (loss ) of $ 60K and a CGT sum of $250K each (the beneficiary receives the non-discounted gain and then needs to determine if a discount applies)

Attempts by a inexperienced tax adviser to alter the distributions to give any other outcome will disadvantage the client.

The key issue is that the trust must distribute at least $1 of net trust income. Within that amount the sum of its parts can be positive income with a CGT nature, foreign source, franked income of any amount provided it exceeds the non-primary production trust income loss. So a good adviser may ask themselves - How can this trust distribute other income so that losses can also be streamed through ?

This is why I believe taxpayers should never DIY any trust tax affairs. It is very complex and easily messed up by them or an inexperienced tax adviser who lacks strength with trust tax issues.

 

Because the ATO have specifically said they will not apply Part IVA to deny the deductions in these negative gearing situation. This is because there is an expectation that the rents will increase over time (as will capital gains). Not a good analogy. A better one would be to compare it to a private lender lending money to a stranger - why would they make a loss willingly?

 

And importantly the ATO does have other tax rulings where it reduces or denies deductions where "others" benefit or the full extent of income is not akin to the deductions being sought eg hybrid trusts, forestry, film and agri schemes, viticulture etc and related party non-arms length income, non-recourse loans, Part IVA schemes. The ATO is happy to play the deduction denied card years later under evasion and avoidance rules

A right to a deduction for expenses incurred in producing assessable income is not automatic. Each taxpayer is required to self assess their return. The risk remains open.

A related party loan may be found to be non-arms length, noncommercial, a scheme or even a sham ie not a loan.

 

I need professional advice on audit risk management lol

Thanks for the insights