Scenario: I have a discretionary family trust as my chosen investment vehicle. I lend the trust say $1mill to invest across different assets. In the future I need $100k for a personal expense. I have a loan on my PPR which is fully offset in a offset account. Trust borrows $100k drawn from the PPR loan and re pays me $100k which I need for personal use. Is the interest accrued on the $100k that the trust borrowed from the PPR loan tax deductable?
Sorry I am not sure I follow what you said. The $100k that came back to me from the trust needs to be drawn from a bank loan that I hold on the PPR. So there will be the 4% or so interest charged by the bank. Are you saying I can claim the interest as a tax deduction myself as much as the trust can?
You lend me $100,000. Then I borrow $100k from you to pay back you. Net result is I owe you $100k. Nothing changes so no change in deductions
Keep in mind a trust isn't a legal entity so it can't borrow money. You would have to lend to the trustee, which makes it impossible if you are both lender and borrower.
Ok I understand that part. Though we have a corporate trustee. And the money being borrowed from me via the ppr loan attracts interest. So if I lend the money from my ppr loan which attracts interest to the corporate trustee to pay money back to me personally would the interest associated not be tax deductible by the trust?
Income from work and also income from investments as distributions from the trust. As the income came in we use it to add investments in the trust. Some of it also comes across as loans from another company we hold that we also use as an investment vehicle. So multiple sources I guess. Maybe this scenario is better analysed after we do the review of the structures.
Are you charging interest now? Is the loan term coming to an end under a written agreement? If you are not I would think you need to consider part IVA. You would be gaining a tax advantage.
No interest being charged. No written term agreement. But no tax advantage either. I say that because if I pay $$ to myself as interest or as a distribution I get it either way. So no difference from a tax perspective. The way I look at it is while I haven’t set it up as traditional loans with interest and official loan agreements at no time am I gaining a tax advantage under this arrangement. I believe it’s all tax neutral. Again that’s how I see it but why i will get the whole structure reviewed by a specialist such as yourself to make sure I’m doing it correctly. Appreciate your input so far. Will probably be much easier for you to navigate this one after the structure review is done.
This bit confused me. How does the trust draw from the loan? Who’s name is the loan in? Is the ‘Ppr’ loan in your name? Or the trustee atft trust (with a gtee from the property owner!?)? If the former, how does the trustee ‘draw’ from a loan that doesn’t belong to it? Also. If your not currently charging interest on your loan, but expect to lend money to the trust so it can pay it back to you, and incur interest, in pretty sure the ATO will disallow the transaction? But Terry would know more than me. Blacky
Is the trust able to repay the money to you before you lend again? No written agreement is a concern, especially if a related company has lent the trust. This could be a deemed dividend
Sorry guys. The penny just dropped. I think I now understand what your saying and based on that technically I can’t claim the interests. Yes the loan on PPR is in my name. So I would be drawing the money and lending to the trust. I would be incurring the interest on those funds that I want to lend to the trust to repay me money I lent to the trust earlier from personal funds that do not incur interest. Yes I see how the ATO may frown on such a transaction and not accept the interest as tax deductible as technically those specific funds where not used by the trust to invest. So I guess another option would be to take out a loan against a IP held by the trust in the name of the trust / trustee. Then I can draw funds from that loan to repay me personally for personal funds I previously lent to the trust. Those funds drawn from a loan against a property that’s owned by the trust should then be tax deductible. Apologise for the confusion.
Thanks @Terry_w . Will look at putting all the correct paperwork / agreements together as part of the structure review process. The company that I lend the money to the trust from is a seperate entity all together. Not sure exactly what classifies it as a related entity but I don’t think it is. I don’t think the loan could be deemed a dividend as the trust is not a shareholder of the company. And this company is not the trustee. The more I think about it the more I realise how important it is that I have an expert like yourself @Terry_w carry out a review of the structure to ensure everything is setup and is operating in the correct manner. Actually looking forward to learning a lot from the structure review process.
I would suggest personal tax advice concerning the trusts ability to incur interest and claim a deduction as well as the overall impact of the whole arrangement. Borrowing to onlend money can also be considered a round robin arrangement and the ATO would always be happy to cancel any tax benefit under Part IVA. And in round robins there is usually a income and a outgoing issue to both be considered. There may also be asset protection and tax loss concerns with such a arrangement
Thank you all for the feedback. I have reached out to @Terry_w to conduct a review of the structure and vehicles used to hold investments and how they interact with one another. Cheers
