Loan Tip: Serviceability When Controlling a Trust which Distributes Income to Others

When a person who is applying for a loan controls a discretionary trust if they cause the trust to distribute its income to themselves this income can generally be taken into account when working out their serviceability.

Similar when the borrow controls the trust and the income of the trust is distributed to a bucket company which they own and/or control.

But where the trust distributes income to other family members who are not borrowers then the income cannot be used for serviceability


Example

Homer operates and controls the Simpson family trust. He causes the trust to distribute the $60,000 annual income to his 3 adult kids who are not working.

Homer goes and applies for a loan for a new property.

Can the $60,000 be used for serviceability in working out how much Homer can borrow?

Generally no, as it is income of other people – it could be used if the 3 kids were borrowing perhaps.

 

Would this be the same for testamentary trusts where the trusts are distributing to minor children of Homer?

 

Yes

 

There are some exceptions to this.