Possible for a trust to use a loan in personal name and claim interest?

Discussion in 'Property Finance' started by thydzik, 26th Jun, 2018.

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  1. thydzik

    thydzik Well-Known Member

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    Hi All

    Is it possible for a discretionary trust to use the loan account that's in a personal name and claim the interest deductions as you would if it was in the trust's name?

    Are these easy to setup, what is involved and are there any catches with the ATO you need to be careful of?

    Are they any additional taxation responsibilities for the 'personal name' entity, even though their is no financial benefit?

    Thanks in advanced.

    Travis
     
  2. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    A trust is not a legal entity so it cannot borrow or lend money.

    If a person lends money to a trustee, under a written agreement, on arms length terms the interest may be deductible.
     
  3. thydzik

    thydzik Well-Known Member

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    Thanks Terry, I should have mentioned, lent to Trustee ATF Trust.

    There is no issues with the ATO?
     
  4. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Depends on how you do it.
     
  5. thydzik

    thydzik Well-Known Member

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    Thanks Terry, I'll send you PM.
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    ATO issued a specific ruling on this issue (which is well know as non deductible) in past few days

    Its TD 2018/9

    Their view = No deduction for an interest free loan. An undocumented loan appears to produce no requirement for the trustee to pay the loan or the interest.

    A related party loan agreement may avert that. But doing so after the event may not work
     
  7. thydzik

    thydzik Well-Known Member

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    Thanks Paul, I'm trying to set up a new structure where the personal name will charge interest to the trust equal to what the bank has charged the personal name. I.e. there is no financial benefit for the personal name entity, they are just a middle man who can get a lower interest rate from the bank.

    Is this possible to setup?
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    A solicitor can. Yes. Definitely not a issue for an accountant to address since a loan agreement is a legal doc and a legal service. Done badly it would be a concern.
     
  9. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    A borrows from the bank and lends to B on the same rates and charges.

    You would have to consider also is that an arm's length commercial transaction. It is not, but would it matter is what you need to consider.
     
  10. thydzik

    thydzik Well-Known Member

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    Just to close this one off,

    What I initially thought of as having the personal name as a middleman with no benefit isn't possible. What needs to be done is in order to claim the interest from the bank as a deduction, you need to be using the money for investment purposes, if you are simply onlending it at the same rate, that is not an investment purpose and so you will be caught out trying to claim the banks interest as an expense.

    I managed to find
    Legal Consolidated Barristers & Solicitors. National Australian law firm
    Which offers a loan agreement for $99.
    Which specifically states you need to make a small profit on the on-lending money, even 0.1% additional is enough. It does mean a small income declaration is required on your personal tax return.
    The wording can be fairly generic which allows the the amount and interest to be changed by an exchange of emails or letters.
     
  11. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    This is incorrect.
     
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  12. thydzik

    thydzik Well-Known Member

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    They provide a sample loan agreement here;
    https://www.legalconsolidated.com.a...2016/04/loan-agreement-sample-with-hints1.pdf

    And they provide lots of helpful hints when building the document.

    i.e. for my specific question;
     
  13. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    That doesn't make it right!
     
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  14. thydzik

    thydzik Well-Known Member

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    I got the same information from an accountant:

     
  15. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    I disagree
     
  16. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I agree with Terry. There is no requirement for interest income to be higher than costs incurred. Thats fundamental tax law. In some cases it may be considered a scheme if it results in the party inflating a deduction through such an arrangement. Many disallowed tax schemes use this principle.

    I would use the online loan agreement to start your fireplace without personal advice. The suggestions about interest rates are not all there. What about a Div 7A loan compliant agreement ? Or what about a rate pegged to a specific account.? What happens if a fixed rate is broken ? Precedent document services are a VERY poor idea. I question if a online legal precedent document is a legal service - if its does Thompson Reuters may have a problem with their Cleardocs site. If it is which state governs ? Legal Consolidated may need to be a NSW, Vic etc legal practice. Is it ? If its legal services and they dont advise on the document content and client specific issues its probably not a good agreement. eg The agreement and the loan maintenance are not maintained - Is it a sham ? (Probably)

    Ahh I see Brett Davies is back. Hasnt changed the sales pitch from the days of Law Central. Anytime you see someone who says you benefit from PI insurance - Worry. The ONLY way you will access their PI is if they are negligent and you can mount a case against the AND win AND their insurer pays the claim. The insurer could fight you or deny liability or the claim could be outside the scope of the policy. Most PI policies say an insured must not offer insurance or offer that a policy covers an event - ONLY the insurer can accept a claim. We have PI cover. It protects US from a claim if WE make a error.
     
  17. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    is a profit of 0.01% a commercial transaction?
     
  18. thydzik

    thydzik Well-Known Member

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    Thanks again Paul for the detailed reply.

    just some non-professional thoughts.

    I don't think it can be classified as a scheme, as the loser is the bank, not the ATO. Also by inflating the interest slightly, you get a higher personal income which may not be as beneficial with tax, compared to if that income was in a discretionary trust.

    Div 7A loans are about a company lending to an individual, this case is an individual lending to a company.

    Out of the blue Legal Consolidated happened to be in the state (WA). To me, Legal Consolidated only provides a legal loan document, and up to the user to set the terms. Apparently it is okay to leave it generic and adjust the payment terms via letter/email. If I would do this, I would make reference to the banks interest rate, loan amount and period specifically, and +0.1% if necessary.

    Most people I have spoken to have said it is very common practise. But Terry's comments have made me cautious. I spoke to the ATO yesterday, and they directed me to Individual Instructions, D7 Interest deductions "interest you paid on money you borrowed to purchase income-producing investments". And advised to put in a non-binding advice request initially which I did.
    The question I asked was; Is on-lending the banks money at a rate 0.1% higher so that the corporate trustee can get cheaper funding considered an income-producing investment?
     
  19. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    poorly worded question!
     
  20. thydzik

    thydzik Well-Known Member

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    The ATO is useless, provides some irrelevant TD and then requests I lodge a Private Ruling. How can nobody have done this before.