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

The ATO can't give you legal advice.

And what makes you think nobody has done this before?

 

How would you have worded it?

 

What do you want to know?

 

I would have thought an early engagement would be more relaxed in the information they provide, especially since non binding. I thought it would have been asked before and they would have a standard response available.

 

That would assume a standard situation is in place.
Rarely are two situations the same, albeit they may have similarities.
Hence their response states ‘your personal situation.’

Blacky

 

Finally got the result of the private ruling. In summary you can claim a deduction equal to the amount of income you earned i.e. the rate on lent can be the same.

 

What was Question 2?

 

Question 2 was if you need to increase the rate a bit, but they combined the answer to both in Question 1.
Will be made public in another months time under authorisation number 1051433390741.

 

Legal Database

 

Based on the edited version this is a poorly worded question and facts and shouldn't be relied upon.

It seems the taxpayer didn't provide a copy of the draft loan agreement as it says the loan agreement "wording would mimic the bank terms". This will be costly to produce and I have never seen a private loan agreement mimic a bank loan agreement. It is also vague. Will there be a mortgage over real property? Will it be a legal mortgage?

The relevant facts also say the loan will be at 'market rates'. Since a bank is lending to trusts at rates higher than they will would lend to individuals this would imply a market rate for you lending to the trust would be higher - assuming there is a mortgage. If no mortgage it would be even higher still, perhaps 10%.

Also the taxpayer didn't ask about Part IVA.

My advice would be not to rely on this private ruling, even if you are the taxpayer that applied for it.

 

The ruling doesn't say this.

 

thanks again Terry for your insight.

In general, I wasn't happy with the ATO's response as I do agree it wasn't 100% clear. But what is the layman supposed to do.

I guess when I mentioned the mimic, I was thinking the key components of a loan only, rate and period.

I agree about the market rate, but at the same time it says 'mimic the bank terms to the individuals'

Part IVA was discussed verbally only, but we couldn't see how it would come into play. as a low interest deductions means higher income and more tax.

 

I agree, and this is what I seeked clarification on as I wasn't happy with the wording.

With even the ruling stating 'Where the individual on-lends at a higher rate than what the bank is charging the individual to borrow, an arms-length transaction is taking place."

ATO then pointed me to this line "A deduction is available up to the amount of income that is earned from the lending."

 

Get some proper advice.

 

I could have told you that and Terry also said same. Not sure why a ruling was required. A ruling is only as good as the questions asked at that time.

What isnt apparent with this ruling is what the loan agreement says and how the loan is accounted for and maintained in the future. If the loan is poorly managed and not on arms length terms then deductions may cease or be at risk.

Also interest is NOT automatically deductible just because of the loan agreement. If the trust buys shares (or land etc) that it holds for three years and the shares / land do not produce income but are held for later sale at a profit I would question the interest deductibility. It may form part of the CGT costbase. This may defer the tax impacts until the shares / land are sold. And the future gain subject to a 50% discount further eroding benefits.

And if investments are blended (ie shares that produce income and those held for resale at profit) then a blended loan exists and apportionment may be complex or even truly so hard the ATO denies deductions on review and allows the taxpayer to object and appeal.

 

I'll PM you shortly.