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

There is no legal requirement to open a bank account, unless the trust deed requires it. But it would be a good idea to open one asap.

 

Trust deed doesn't require it so I guess we can take our time until actually need it. Don't want to sound cheap, but $10/mth for a non-used business (family trust) account doesn't sound beneficial until required.

 

Mmmm.... you're scaring me a bit. Well I did specifically ask my lawyer for legal advice and that's what he recommended. Perhaps I'll have to chase accountant to see what they have to say.

But by the same token, it is linked to PPOR, and we are withdrawing off that to pay off the debt. I don't see how you can make it deductable?

 

Moreover, the land that we want to buy is under a UNIT TRUST which distributes units to my DISCRETIONARY TRUST.

Thus as read prior, it would be hard to justify to the ATO why money put in would be an investment seeing that I'm not guaranteed to have a return given the discretionary nature of the family trust that holds the units.????

 

Its probably correct advice.

If its a unit trust the funds are to settle units. So from loan to trust is VERY correct. The trust hasnt borrowed a cent. It has just received proceeds for units. The unitholder has likely borrowed and its essential their units are settled that way. The deed likely contains specific or implied clauses which require funds to be received by the trustee in order to issue units.

This issue can demonstrate how the refinance principle operates and how easy it can be to think a deductible nexus has been broken when it hasnt. The trust can receive $ from the unitholder (dad) and then redeem another unitholder (mum) who uses the $ to buy a PPOR. The interest for the loan to new unitholder (Dad) may be deductible. There is not a need to trace the use by the trust of the money. Just evidence of settling the units as a fixed trust interest works. So banking the $ into the trust bank account is critical to that purpose.

Disc trusts are different

 

Plenty of banks with no monthly fees

 

Is the trustee of the discretionary trust borrowing to buy units?

 

Good question Terry

I have seen some instances where the trustee of the DT and the UT are the same company to save $....Hard to lend money to yourself. Then there can be instances when the trustees wont have a valid loan agreement etc. Puts the loan deductions etc at risk too.

 

It sounds like the unit trust has a discretionary trust as the owner of the units. But the funds came from the individual.

 

Yep. Essentially Company A is trustee of the Unit trust with 2 units. This entity will buy the land.

One of the units is owned by my family (discretionary trust). The trustee of this family trust is myself (I know, not corporate).


Thus I'm not sure given this setup, if I were to get $400k out of my redraw facility, I"m not sure if you could justify the interest paid on that as for "investment purposes" and have a deduction on that.

My understanding, after asking my accountant, is that only if there is a loan taken out on the land and we were to take a loan out on that, would interest be a deductible expense for the unit trust. However the status quo, I"ll probably be losing out on @5% $20,000 interest I'm paying which is effectively on my PPOR despite the $400k going to buy this investment property.

 

That's the annoying thing I realise. If the Unit Trust had 2 units and I myself was a unit holder, I could claim the $20k pa. interest as an investment expense as I can prove I was the direct beneficiary. As the unit holder is my discretionary trust, I feel like I lose out on the $20k pa interest deductability, with the plus side being tax benefits of a discretionary trust (which hopefully outweigh the downside).

 

My general experience is that these arrangements are difficult to establish properly but can be done with good advice. However I often then find that 3 years or so down the track the movement of funds within loan accounts is so blurred that it becomes difficult to prove a connection on the ultimate loan to the original position. TR 2000/2 is a good document for this.

 

Two units in the UT..One for the DT and one for you... OMG....What state ?? Dont tell me its QLD property.

 

A beneficiary of a discretionary trust does not have a FIXED entitlement to the trust income. The trustee of the DT has a unfettered discretion to withhold or benefit others. Only the DT has a fixed right to a share of UT income. This means interest incurred by a DT beneficiary is not deductible under the nexus contains in s8-1 of ITAA97. The deduction must be claimed by the DT so the DT must borrow the money AND use the proceeds to buy the property.

 

Also keep in mind not all unit trusts are actually fixed trusts

 

This is a rather important issue to be unsure of.

If you borrow to buy units in a fixed unit trust the interest on your loan may be deductible - to you. But if the trustee of the discretionary trust is bororwing to acquire units the interest may be deductible to the trust. But this would all depend on the set up.

I don't understand what your accountant is saying.

 

I found a fixed unit trust that was a hybrid trust. Yet it claimed it worked for land tax. It didnt. Supplied by a major firm.....

 

Perhaps the accountant does not understand ? Wouldnt be first time.
If this property is in QLD I question the stamp duty consequences of two unitholders each with one unit where one is a DT

 

No sorry for the ambiguity.

Property purchased in FIXED Unit Trust, with 2 units. One for my family's Discretionary Trust, the other unit for my friend's Discretionary Trust. (no individual directly holds a unit).

In terms of my family's discretionary trust, I'm the trustee, with myself and two other family members as beneficiaries.

Yep, that's the position I understand and am resigned to. The accountant essentially said you need to suck it up, and given the above structure, won't be able to claim a deduction anywhere on the interest paid on your $400k redraw from your PPOR, reason being is the PPOR is under your name, which isn't tax related to either the Unit Trust or the Discretionary trust.

If the PPOR was in the name of the DT on the other hand... that might be different... mmmm... now you got me thinking... mmmm.... but the stamp duty to transfer the PPOR would be around $15k+ in itself... mmmm.... might not be worth it...

 

Problem is I (person) is borrowing money to invest in a Fixed Unit Trust, with 1 of 2 units belonging to a discretionary trust (the other to my mate's DT).

I feel like my accountant and what you and Paul are saying are the same thing, the interest paid on the redraw from my PPOR is NOT DEDUCTIBLE in anyway, simply because I (interest paying) am neither the person purchasing the property (the fixed unit trust is) or holding a unit of the fixed unit trust (a discretionary trust is).

Sucks, but I think that's the way the ATO looks at it, I'm pretty sure of that now

What my accountant has suggested is essentially suck up the no deductions, and later on when you take a mortgage as the Fixed Unit Trust on the land, pay back the original loan I made to the FUT and then claim the interest on the mortgage/loan the FUT has newly made.