possible to payback personal loans with bank financing and claim interest?

Hello

I have a discretionary trust with corporate trustee, I have been lending personal money to the trust and 0% interest.

Is it possible to repay these personal loans with bank financing and then claim the interest expenses as a deduction?

Thanks.

Travis

 

A trust can refinance its loans if provided so in the trust deed.

If the original asset acquired by the trust was for income producing purposes (or necessarily incurred in carrying on a business) the interest on the refinanced loan will be tax deductible.

The original lender can use the repaid funds for any purpose.

 

thank you, that is good to hear.

 

Ross do u think Part IVA could apply?

 

Has this one been test...via the ATO taking someone to court?

 

Not that I know of.

I agree it would be deductible. But because there is a tax advantage and related parties involved it could be a Part IVA risk.

 

Yep...risk without a private ruling or the ability to fight the ATO in court...their win rate if they take you on is over 90%

 

It depends on the facts.

But I have seen this happen a lot.

 

have you properly documented the loan between yourself and the trust ?

 

yes, the loan has been well accounted for in the financial statements.

 

that wasnt the question. the financial statements are one thing but do you have a properly drafted loan agreement between yourself and the trust ?

ato may well argue these were gifts and not loans.

 

it is clear on the financial statements that they are liabilities.

properly drafted loans could be produced, but essentially the borrower and lender would be signing the same.

 

terry is the lawyer and would be in a better position to answer but the ATO would probably ask why you don't have a loan agreement in place.

Most commercial transactions would have loan agreements in place. So is it a gift or a loan ?

you couldn't backdate a loan agreement but if you had evidence to show it was a loan from the beginning then could put in place documentation to show that. again something for terry to answer.

my preference would have been to have a loan agreement in place from the beginning.

 

If the lender and the borrower are the same person there could not be a loan contract.

If there is no written loan agreement the ATO will deny the deduction. This is clear from their private rulings. At law a contract can be oral, but for tax it needs to be in writing. You can't legally back date contracts, but you could put an oral agreement in writing.

 

Thanks Terry, helpful.