Loan Tip: Discretionary Trust income and Serviceability

Where a person is a beneficiary of a discretionary trust, there is never any certainty of them ever receiving income from the trust. If there was certainty, then the trust would not be discretionary. This is the case even where the person controls the trust.

Because of this it should be that a lender would not take trust distributions of income into account in working out serviceability.

But many do and will take into account trust income where the borrower is in control of that trust, this is because, arguably, the borrower could divert trust income to themselves if they wanted to.


Recently ANZ has changed their position on this and they will now take into account trust income where the borrower is trustee of the trust or a director of the trustee and the trustee has the discretion to distribute income to themselves.

ANZ also want the trustee to write a letter with this wording:

“I understand and acknowledge that:

• I am applying for [name of credit product]

• ANZ’s assessment of my ability to make repayments is dependent on me having access to some or all of the income generated by [name of trust]

• I intend to make arrangements to ensure that any income that is currently distributed to the beneficiary(ies) through [name of trust] will be made available to me (if required), to make repayment to the loan”


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This is very strange indeed because the trustee is not the one applying for finance, and a trustee cannot make legally fetter their discretion to ensure that income is diverted to themselves. But the letter wording seems to be sufficiently vague to be meaningless, but allow ANZ to claim that they took prudent steps to show that income used for servicing was income that was potentially available.

 

Will be interesting to see if ANZ still allow for trust distributions to be used as income if a person is only a beneficiary and not a trustee. Potentially could be doubling up on the same income!

 

No they won't according to what they released. The beneficiary has to also be trustee or director of trustee.

Directors are easily changed.....

 

I have been asked to provide a accountants declaration concerning the distribution of trust income and have refused. If a trustee has discretion what reliance would the tax adviser have ? I cant direct a trustee. The trustee can do as they please. And a trustee Director can die or be replaced etc. The trustee itself can also be replaced.

 

Yes a trustee cannot fetter it's discretion.

 

If the proof of income is ATO assessments, do lenders still have issues with the income being derived from a trust?

 

Depends on the lender and who is controlling the trust

 

Are there mainstream lenders that will accept ATO assessments (say 2 years) as proof of income where the borrower controls the trust?

 

Yes

 

Do they generally assess the beneficiary's (ie the borrower's) full distribution (ie no shading) and any particular traps to be aware of?

 

It would be treated as self employment income basically

 

Hi Terry, sorry I may have misinterpreted your original post.

I had originally assumed that serviceability would be based on income of the beneficiary ie actual distributions to the beneficiary (per tax assessment of the beneficiary).

I've just reread. Are you saying serviceability can be based on total income of the trust even if not all trust income was actually distributed to the trustee/borrower/beneficiary in the last two years, because it could be in future?

 

Yes potentially in some situations such as where the income is distributed to a bucket company. Its all tricky though.

 

We have been asked to provide letters even when the new borrower is not a director of the trustee company (merely a beneficiary) detailing that trust distributions would be ongoing, the bank held that to be sufficient.

 

Interesting, but how would a 3rd party know this would be occurring. If the trustee confirmed it they would be breaching their duties as trustee too.

Lenders ask for silly things.