Join Australia's most dynamic and respected property investment community

Set up a wrong trust to buy an IP

Discussion in 'Property Finance' started by melbourne171, 21st Sep, 2016.

  1. melbourne171

    melbourne171 Well-Known Member

    Joined:
    7th Sep, 2016
    Posts:
    201
    Location:
    Unknown
    Initially, I set up a hybrid trust in order to claim tax on interest on the LOC loan to purchase unit trust. The hybrid trust has been set up via a law firm. Then, my accountant said this trust cannot be flexible to distribute income to family members. As I forgot about the original reason for set up hybrid trust, then I let her set up a new family trust. I have already signed contract to buy a IP and set up loan via this family trust. Now, I read forum threads again and notice that I cannot claim interest on the LOC against PPOP to deposit for this IP for tax deduction.

    Can I lend money from LOC to family trust with interest rate same as LOC interest rate? and document required?

    The a portion of the LOC has been used to deposit for other IP under my personal name. If I use this LOC to deposit for this new IP, will the LOC be contaminated?
     
  2. melbourne171

    melbourne171 Well-Known Member

    Joined:
    7th Sep, 2016
    Posts:
    201
    Location:
    Unknown
    Hi
    Can I update the Trust Deed in order to change it from family to hybrid trust?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,043
    Location:
    Sydney
    Yes - but you should consider how and what the consequences would be. get legal and tax advice.

    It would be mixed purpose.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,043
    Location:
    Sydney
    Yes if the deed allows the powers to do this, but seek legal and tax advice.
     
  5. melbourne171

    melbourne171 Well-Known Member

    Joined:
    7th Sep, 2016
    Posts:
    201
    Location:
    Unknown
    Now I think about a creative approach
    I can borrow from LOC to buy units from my unit trust that has been fist set up. Technically, I will transfer money from LOC to this unit trust's bank account. Next step, lend unit trust money to family trust by transferring fund from unit trust bank account into family trust bank account. Then, use money in family trust bank account to deposit for IP purchase.

    In this case, I can claim the interest on my LOC. Is it correct?
     
    Last edited: 21st Sep, 2016
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,043
    Location:
    Sydney
    You should seek legal advice on this.

    You would only be able to claim the interest on the loan used to buy the units if you had an absolute right to both income and capital of the unit trust. If the unit trust will have no income the interest could not be deductible.
     
  7. melbourne171

    melbourne171 Well-Known Member

    Joined:
    7th Sep, 2016
    Posts:
    201
    Location:
    Unknown
    Thanks Terry. I will check with my accountant and ask why she set up a ABC Pty Ltd as trustee for Family Trust for me. Any benefits.

    I am a shareholder of ABC Pty Ltd. I use borrowed money to buy shares of ABC Ltd. ABC Pty Ltd's capital is used to acquire investment assets via a Family Trust. Therefore, interest on borrowed money is deductible against personal income tax. That is why she set up a ABC Pty Ltd for me.

    I will double check with my accountant tomorrow. She may give me an answer.


    Must
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,043
    Location:
    Sydney
    I am not sure of your set up, but cannot see how this could be the case.
     
  9. melbourne171

    melbourne171 Well-Known Member

    Joined:
    7th Sep, 2016
    Posts:
    201
    Location:
    Unknown
    I will split the LOC account into 2 accounts with diffferent purposes to avoid loan contaimation before settlement.

    How hard to convert family trust into hybrid trust? I may have 3 weeks left prior to settlement.
     
  10. Greyghost

    Greyghost Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,262
    Location:
    Melbourne
    Why set up such a structure in the first place. Your accountant is creating fees for themselves...
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,043
    Location:
    Sydney
    You will need to get advice on the CGT and stamp duty consequences of the change, but it would be relatively easy.
     
  12. melbourne171

    melbourne171 Well-Known Member

    Joined:
    7th Sep, 2016
    Posts:
    201
    Location:
    Unknown
    Thanks Terry.
    I talked to my accountant. Happy with her advice. Keep the same structure.
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,400
    Location:
    Sydney
    Hybrid trusts are a shocker when it comes to approval of loans. And tax concerns.