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My Loan to my Discressionary Trust

Discussion in 'Accounting & Tax' started by MelbourneStephen, 12th Aug, 2015.

  1. MelbourneStephen

    MelbourneStephen Member

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    I hope I'm placing this question in the right place.

    I plan on making a $30K loan to my discressionary trust to be used for investment purposes that hopefully if goes well should result in a capital gain in a couple of years. I am and my partner are beneficiaries of the trust and wonder if I need to have a loan agreement in place before doing that and 2nd issue, do I need to charge interest to my trust on the loan or not?

    I don't wish to fall foul of any kind of ATO compliance issue/s if I can help it.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If the trust will pay interest - Yes. Of course that interest is assessable income to the lender but if they borrowed it they may have an offsetting deduction.
     
  3. MelbourneStephen

    MelbourneStephen Member

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    Thanks Paul, can I lend money to my Trust interest free or not?
     
  4. D.T.

    D.T. Adelaide Property Manager Business Member

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    Depends on what you're trying to do, but I'd do it at market rates (or at least forward on the same rate as the place you're getting the 30k from.)

    The interest the trust pays will be deductible to the trust , and the interest the people receive will be assessable income.

    Seek accountant's advice first though!
     
  5. MelbourneStephen

    MelbourneStephen Member

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    Thanks guys, the $30K will be from my own personal savings so it's not costing me to borrow.

    Do I need to have a loan agreement in place to lend my own money to my own trust to invest in a business development?
     
  6. D.T.

    D.T. Adelaide Property Manager Business Member

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    Yes, definitely.

    Seek advice about the rate charged though
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It is not 'your' trust - you may control it but it is a trust for the benefit of probably many beneficiaries. The trustee has a duty to these beneficiaries.

    You can lend money to who ever you like, but the question is can the trustee borrow from you? Who is the trustee? If it is you then legally you cannot contract with yourself. If the trustee is a company or other person then the trustee will need to read the deed and determine if it is allowed to borrow and if it can are there any restrictions?

    If none there you could lend the trustee. You can lend at zero interest. The ATO could look at this as a scheme to divert income from yourself to the trust and then to lower tax paying beneficiaries but I think that is probably a low risk.

    You will want a written loan agreement in case you lose control of the trust and/or die as you would want your money back so it could be left to your estate.
     
  8. MelbourneStephen

    MelbourneStephen Member

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    Thanks Terry, you make some interesting points.

    Clause in the trust deed that I am a trustee and beneficiary of states clearly the trustee can contract with itself in a number of areas including the borrowing money being allowed without restrictions.

    I'll eventually want my $30K working capital loan back into my personal savings once the business venture, the trust is investing in, nets the anticipated capital gain, so your suggestion for a loan agreement between myself and the trust makes perfect sense.

    Thanks again to everyone.
     
    Last edited: 13th Aug, 2015
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Deed may allow it, but keep in mind you cannot contract with yourself and you cannot sue yourself.

    It would be a notional loan though.