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Trust borrowing & loan agreement

Discussion in 'Accounting & Tax' started by ryau86, 11th Feb, 2016.

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  1. ryau86

    ryau86 Member

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    Hi All,

    We would like to test out a scenario to see if it is feasible and legal.

    Scenario:
    A fixed unit trust with a corporate trustee purchases an investment property, whereby Person A will own 100% of the units, will be the sole director of the corporate trustee and will also own 100% of the corporate trustee's shares.

    The home loan will be taken out by the trust and thus the loan name will be in the corporate trustee's name. In addition, the trust will be entitled to the entire rental income stream.

    Upon settlement of the property, a loan agreement will be put in place between Person A and the fixed unit trust. The trust will lend a sum (equivalent to the trust's home loan) to Person A for the purpose of acquiring additional units at an interest rate roughly equal to what the bank is charging the trust - thus creating a nil effect for the trust's home loan repayments.

    Since the property will be quite new, the trust will claim a significant amount of depreciation and also deduct the usual property upkeep fees (e.g. property management, water, council, strata, etc).

    The remaining profit/money will be distributed to Person A via his unit holdings.

    As a result, Person A will be claiming this "negative gearing" against his personal income.


    Any ideas if this is possible??
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What are you trying to achieve?
     
  3. ryau86

    ryau86 Member

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    A way to "indirectly" negative gear trust losses against personal income.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Why not just borrow to acquire the original units?
     
  5. ryau86

    ryau86 Member

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    Most banks now will not allow it - except SGB I found...

    Lenders want the name on the title of the property to be the same as the name on the loan.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Lets think this through

    Trust borrows $100,000 to acquire a $100,000 property. R has say 100,000 units with each unit valued at $1

    R borrows $100,000 to acquire a further 100,000 units. There are now 200,000 units with each unit valued at 50c.

    Where does R get this $100k? What about the effect on borrowing capacity?

    If R was borrowed to acquire further units the interest could be deductible. But there are complications because only half of the units on issue will be borrowed.

    You may want different classes of units but if a unit holder is not presently entitled to all the income and capital (subject to demand) then the interest won't be deductible in full.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Another method, less than ideal, is that the trust borrows money in the trustee's name and immediately on lends this to the unit holder who borrows to buy the units.

    I have done a loan agreement for this without advising on the tax aspects as it was done by the client's accountant.

    You need good tax advise on these if you plan to implement.
     
  8. ryau86

    ryau86 Member

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    Yes! I think that was what I was trying to achieve!

    How does the trust acquire further properties in the future?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It probably shouldn't.

    there are 4 reasons to only have 1 property in a unit trust:
    1. land tax
    2. stamp duty
    3. CGT
    4. Transferring units to a SMSF in the future.
     
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  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There is a 5 and 6.

    5. The units issued on acquisition of the second property must be calculated at market value immediately preceeding the issue. Complex as they wont be initial $1 units. Most unit trust registers don't adequately track and trace individual unit pricing etc but retain old style concepts that units are all homogenous. They aren't and for CGT purposes its critical to ensure they aren't.

    6. The trust would be unable to have different beneficial owners of units in respect of individual properties. Ie 40% Dad and 60% Mum for IP1 and 50/50 for IP2.

    I would never recommend a UT own more than one property.

    For SIS reg 13.22 unit trust strategies it is critical that each property be held by a separate trust and possibly with a different corporate trustee in each case too.
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The bank wont do this. The bank will settle the property using the borrowed funds. So the trustee has acquired the property using trustee borrowings. The use of borrowed money for acquisition of units is a sham.

    If you could convince the lender to round robin the funds from bank - trustee - personal account - trustee - vendor then I argue such an agreement on arms length terms might comply.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The bank wouldn't know about it. It would be just a notional settlement like with a unit holder borrowing to buy units. trustee provides funds to unit holder who provides them back to the trustee who then buys the property.

    Less than ideal and may not be effective in the ATO's eyes and a private ruling is recommended.

    Only for those with fixed trusts who cannot get finance with a bank that will lend to a non owner and who are stuck.
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I would argue the loan isnt settled on the units - its settled on the property owned by the trustee and the trust may well otherwise have a quarantined loss. Might not get a private ruling if transaction doesnt occur. Saw it with a few hybrids in the course of issues with ATO opinions. (Accountants usually skip steps for expediency) The ATO then query if units were truly settled on units or if its a discretionary object. All because someone skipped a step. Then completed all the trust paperwork which said unitholder paid for units etc etc. Factual hole in the issue.

    Unitholders who borrow should always ensure that the loan proceeds are correctly disbursed etc. When you go to the trouble expense and issues with a trust then skip such a material issue it can be disputed. eg not have a trust bank account !!
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I agree Paul.