Tax deductible on personal borrowed money to pay for family trust's purchase

I purchase an IP under a family trust. Is Tax deductible on personal borrowed money to pay for family trust's investments? For examples:

1. Is tax deductible on Interest on money borrowed from LOC against PPOP to deposit for this purchase?

2. Is tax deductible on Interest on money borrowed from LOC against PPOP to pay for conveyancing expenses?

3. Is tax deductible on Interest on money borrowed from LOC against PPOP to pay for traveling expenses after the contract date i.e. final inspection, due diligence, meeting town planners ?

 

1. Depends

2. Can be


3. No

 

Thanks Terry.
Can you clarify the depend and can be? Thanks.

 

who is borrowing the money?

 

Hmm @Terry_w isnt there some issue if the funds transfer has been made from an indivduals account directly for the purchase of the asset?

Eg - if it has moved from the PPOR loan account direct to the conveyencer trust account. Technically the money has not come from the trust. So who is the ACTUAL buyer.
In reality a proper loan agreement and funds transfer should have taken place.

Im not sure on this - I just recall similar events creating problems for a client in the past. However, circumstances may have been different.

Blacky

 

Yes could be. Where A pays for a property in B's name there is a presumption of a trust relationship - rebuttable on other evidence.

If the trust borrows the deposit money from the individual and instructs the individual to pay the deposit on its behalf that should be ok.

but where X signs a contract, pays a deposit and then nominates a trust the asset protection is weakened as - whose property is it??

 

And therefore in some states the property may be captured under 'same entity' land tax rules?
Also brings into question deductibility of loans?

Can recall fully. But I remember it getting complicated, messy and ultimately expensive - when it was quite easy to avoid.

Blacky

 

Not sure what the same entity land tax rules are - what do you mean?

If the trustee is the owner it can claim the interest on money borrowed. But if someone else is borrowing money they will not be able to claim the interest if they are not the owner.

 

You: incur interest expense
You: oncharge trust same amount
Trust: incurs deduction
You: receive interest from trust reimbursing you.

Ultimately in and out in your name and deducted in trust. There are 2 loans here though.
1. From the bank to you
2. From you to the trust

There is more complexity to it than this but basically you require a 'back to back' loan agreement

 

GG do you think it ok to charge the same rate of interest? I do, but advise clients there could be a risk that the ATO sees this as uncommercial. A bank has a first mortgage as security afterall.

 

Even though the property is owned by a seperate entity (the trust), the state revenue dept may deem that the individual who provided the funds is the 'actual' owner, and therefore liable for land the land tax.
If you have other properties - this can add up.

Again, I may be mistaken on this.

Blacky

 

Yes, you could be right. The beneficial owner would be the owner for land tax purposes in some situations - a SMSF for example.

 

A common taxpayer mistake occurs with discretionary trusts in the following example.

Taxpayer borrows $ from bank and onlends this to the trust without a formal loan agreement or any special arrangements in place. The trustee of the trust uses the proceeds and buys the IP. The trust or the taxpayer then seeks to claim interest deductions.

Problem is this :
1. The trustee has not incurred any interest. The taxpayer did as they borrowed from the bank
2. NO interest deduction is allowed to the trust OR the taxpayer.

Why ?
1. The taxpayer has no fixed right to receive income from the trust. The trust is a discretionary trust.
2. A beneficiary has no RIGHT or fixed entitlement to income of the trust estate. The deed contains clauses which allow others to benefit or even the right to not distribute income.
3. The taxpayer may well be a beneficiary of the trust but there is no nexus between the interest and a fixed right to receive all the trust income. Its a disc trust.
Therefore the nexus between borrowed money and interest costs being necessarily incurred to produce assessable income is not met. No deduction is allowed for interest. It is necessary the the trustee incur the interest in a valid manner to avoid this.

It is essential in such arrangements that a lawyer be engaged to advise on and develop a loan agreement between the taxpayer who has borrowed funds and the trustee so that the trustee can borrow from the taxpayer and incur interest. This would reduce the trust assessable income representing an allowable deduction.

 

Ok, if you wanna buy a property in a discretionary trust for example for $500k.

Say you need to pay $100k as a deposit and $400k outstanding.


What is the best way to transfer the $100k? What documents are required? What if we don't want to claim interest paid as deductions?


Would the method of paying $100k out of your offset account for the deposit, then $400k to the seller party as a bank check out of your offset account be the appropriate way here? Given the property is to be purchased under your Discretionary Trust?

 

Best way? Would depend on the circumstances and what you are trying to achieve.

If it is a loan you would want a written loan agreement between the trustee and the individual.
If it is a gift you would want a deed of gift.

If you just pay money out of your offset you are asking for problems.

 

Ok physically transfering money out of offset to pay is ok, as long as there is legal documentation to explain the transaction right?


These loan agreements, because they are between you and the trust, can they just be signed with a template and witness (i.e. no lawyer required?).

 

And moreover, what about future expenses, like consultation fees, lawyer fees etc. each time you pay for them, do you need a separate loan agreement?

 

You should probably get some legal advice. If you pay the deposit for someone else's property there is a risk for asset protection.

 

Had a chat with my Lawyer who said should transfer money from offset to Unit Trust's business account, then have business account settle the purchase of the land to leave that paper trail. Accoutnant will write that as a loan.

On a side note:

If you open a family trust and register for TFN and ABN, how long do you have before you need to open a bank account? Or can you wait until distributions to the family trust account are made?

 

Thats bad advice.

Firstly if the offset is linked against a PPOR you will be paying non-deductible debt.

Then if it is a loan what are the terms? Accountant may record the loan in the financial records of the trust - but what is the interest rate, if any? When is it due? It would be at call.

What if you die. Your executor will need to call in the loan - they will be duty bound to. What if the trust doesn't have liquid funds to pay back the loan? It may have to sell a property. I have seen executors actually sue the trustee in siutations like this.