Paying Trust debt with personal funds , then repaying

Discussion in 'Accounting & Tax' started by See Change, 16th Aug, 2019.

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  1. See Change

    See Change Well-Known Member

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    Simple basic question , but want to make sure we don't get it wrong . We've got a few options available to us at the moment.

    We are looking at using personal funds to lend to a trust fund to pay off a mortgage in the trust fund .

    The property then becomes cash flow positive and we use the cash flow to repay the loan .

    What is the tax treatment of the cash flow back to us personally ?

    Is there no tax because we're repaying the loan or is there tax because the trust fund is generating a profit ?

    @Terry_w , @[email protected] ,. @Peter_Tersteeg

    Cliff
     
  2. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    will you be lending or gifting to the trust? Cash or borrowing and onlending?

    Do you mean the trust will be paying its own loan after you money in?

    I did a private ruling for a client recently for similar, the ATO said interest not deductible where borrowing and onlending to the trust, but your situation may be different - is different.
     
  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Q : Are you borrowing to pay out the trust loan ?
    Q : Has the trustee borrowed $$ from you - Can that even legally occur ? (eg You are also trustee)
    Q : Are you intending to lend / advance / gift to the trust ?
    Q : Is there a documented loan agreement ?
    Q : Do you want the trust to pay interest ?
    Q : Do you want your $$ back ? I suspect yes.
    Q : Is this an asset protection issue / concern ? eg You lend to the trust that means trust owes you which is an asset.

    All above needs to be resolved prior to doing anything. A loan must be settled and refinanced and you cant just fix it all up later. Thee bulk of these issues likely require legal advice as well as basic tax advice that a solicitor could also give. ie Deductibility for a refinance

    Not a basic simple question really
     
  4. See Change

    See Change Well-Known Member

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    Answers

    No , we are not borrowing to pay trust out . Funds will be coming from profits from a sale and inheritance . Reason to pay of loan is it is IO , soon to change to PI and we don’t want to have to pay the increased payments .

    Company trustee . When the trust has had a cash flow short fall , we lend money to the trust . We don’t charge interest .

    Intention is to lend money to trust , not gift .

    There are documented loan agreements .

    Obviously , we want the money back , which is inherent in the question. The trust will be cash flow positive and we can distribute to beneficiaries , but obviously that is taxable . If it is a repayment of capital , how is that handled ?

    If we lend the money to the trust , and charge interest , then presumably we’d need to pay tax on that .

    What I’m looking at is not charging interest , but just repaying the principle which is paid out of the cash flow from the trust income .

    Cliff
     
    Last edited: 16th Aug, 2019
  5. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    You can lend money on zero interest terms and the trust can you you back the principal amount without direct tax implications.

    The trust could also potentially distribute capital to a beneficiary tax free.

    Watch out for the limitations act if there will be no repayments and consider the estate planning aspects on death and incapacity
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Depending upon the trust arrangements charging interest may be circular and of limited value. A interest free loan to the trust may remove many element of concern. Payment for the trust to the lender would be a loan repayment (ie discharges debt) and not a capital payment. That repayment wouldnt likely have any tax effect.

    The demonstration in the accounts that the trust has discharged debt would avoid concerns that the payment is income. The trust accounts will show a liability for the advance to the trust. A repaymnet just reduces that. ATO would see this and see no issues of the payment being income. Undocumented it could attract concerns.

    Trust records (resolution ?) should evidence the terms under which the trust receives the funds ie as a interest free loan by MR & Mrs Cliff. Payable at call at the trustee and lenders discretion as trust assets are available.

    May need legal advice. What happens when either Mr or Mrs dies ? Unenforceability of a statute barred loan ? Security ?
     
  7. thydzik

    thydzik Well-Known Member

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    principle payments are not expensed. positive cash flow means income which means tax.
    similar to individuals.

    though, if you can reduce the tax through distributions (discretionary trust). you would be better off since you reduced your interest expense. Assuming the personal funds came from some savings account, and not another offset account.

    -------------------------------------------------
    My posts are general in nature and do not constitute professional advice.
     
    Last edited: 16th Aug, 2019
  8. See Change

    See Change Well-Known Member

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    thydzik

    Your advice appears to be contrary to Terry and Paul's opinions when you say positive cash flow means tax .

    What's your background ? Do you work professionally in the area ?

    It's a discretionary trust . Both of us work , so distributions mean tax .

    Not as concerned what happens to us when we die though it does sound as though we need to have a sit down strategy meeting with our strategic advisor to see what avenues are available to us .

    Cliff
     
  9. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    I think positive cash flow will mean tax payable as the trust is making a positive income which would then need to be distributed.
     
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  10. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Maybe. Depreciation and / or capital allowance deductions, losses from other activities and entity costs can impact this.
     
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  11. See Change

    See Change Well-Known Member

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    '

    Obviously these need to be taken into consideration .

    Ignoring all of that , I was looking for advice on a basic principle which I thought I stated clearly in my opening question


    We're not borrowing anything . I'm not asking for qualifications about how we protect assets etc or whether we charge interest

    The trust hasn't made a realised or unrealised capital gain . This is purely based around trust being cash flow positive once we lend the money to the trust on an interest free basis .

    I'm not asking for the advice of " what should we do in this situation " , just a simple tax accounting principle .

    Cliff
     
  12. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    If you are seeking tax advice thats different. Ask your tax adviser.
     
  13. thydzik

    thydzik Well-Known Member

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    If you are now cash flow positive (or more cash flow positive then before), you have made more income, you pay more tax.

    -------------------------------------------------
    My posts are general in nature and do not constitute professional advice.
     
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  14. See Change

    See Change Well-Known Member

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    I will and always do , but as with all things property investing , I like to do my own dd .

    As it's as it's a question that might be of interest to others , and after all , this is a property investment forum I thought I'd ask here .

    Gives the professionals here a chance to show their knowledge .

    Cliff
     
  15. See Change

    See Change Well-Known Member

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    That was my original assumption , but someone ( non professional ) had suggested otherwise and I wanted to get other opinions .

    I use this place as a sounding board for opinions before we talk to our accountant .

    Thanks for the advice .

    Cliff