Trust lose on loaned money

I am a beneficiary to trust with corp trustee.

The trust become a creditor to a property development which has since gone into voluntary administration. Working out the worst case scenario; if none of the loaned credit is repaid by the property developer, is it classified as a lose in the trust?

Thank you.

 

Could be a capital loss

 

and how did the trust get the money in the first place? If could end up a capital loss to the individual if loaned to the trust.

 

The nature of what was trust property needs to be explored. Was is funds invested or loaned ? Was it equity or some other interest ? eg units in a trust ? The nature of this may broaden eg a loan with a interest rate may mean the loss compounds with unpaid interest. The nature of the creditor interest will address whether it ranks ahead of others eg secured v unsecured. Its possible to negotiate with the administrator to take over the development and complete it. Take caution since there are shonky pheonix developers who will appoint a friendly administrator for this precise purpse to strip unsecured parties out (ie your trust) and they walk away with a greater equity than previously.

A loss wont be incurred until a liquidator makes a determination. An administrator doesnt mean a loss will occur. They could "trade out" or appoint a liquidator. The appointment could even be challenged by a lender for example. They may want their own interests protected. Anything is possible.

A trustee can also be exposed to claims by (other) trust beneficiaries for misuse of the trust property if that occurred.

 

Thanks Terry.

I will call my accountant soon, I'm just in shock and trying to get a sense of the landscape.

The individual (me) loaned the money to the trustee. The trustee became a creditor to a developer/spruikers which is now in voluntary administration.

 

A trust is not a legal entity, you would have loaned it to the trustee. Do they have any money? They would be personally liable.

 

Correct. It was loaned to the trustee (my spouse is the director). It collects rent for an IP in the trust. That's all I can think of. (apologies if I've used the wrong terminology. You must be sick of nuffies like me!).

 

There are two legs to this issue

1. You personally loaned $$$ to the trustee. I would not be satisfied a loss has occurred as you have legal remedies to obtain your funds unless debt forgiveness through an act or a failure to act occurs. A loan in this instance may be a personal use asset and no CGT loss is eligible on personal use assets. However if interest is payable under a legal obligation then its possible the personal use asset exception no longer applies so a CGT loss could be recognised BUT for the recoverability. You have legal capacity to demnd or sue the trustee for repayment. It is THEIR loss, not yours and they have other trust property to enable the loass to be paid. Since this is a discretionary trust a loan to a trustee does not mean a expectation to receive income otherwise occurs. If you lent the $$$ under an "at call" facility its doubtful any CGT loss can be personally recognised. The documentation of the loan terms should already exist. If it doesnt then Part IVA could apply to efforts to "dress the loan" now.

2. The trustee has invested / lent ? funds and expects a loss. This hasnt occurred yet and would need to be deferred until a liquidator determines that a loss has occurred.

 

Thank you Paul. It is really kind of you to take the time to help me understand.

2. Yes, I absolutely need to wait for the end result before any loss occurs. I am preparing myself for the worst-case possible to help with my current anxiety levels.

Once I know the final position, should I be getting advice (similar to what you've provided) from a lawyer or an accountant? I feel like this could be out of my current accountant's comfort zone.

 

If you want advice about the tax issues relating to the loss then see a lawyer or tax agent.

 

Thats a bad sign.

 

Could you please explain how it could be a capital loss to the individual that loaned the money to the trustee? Thanks

 

CGT event C2 could arise.

I might write a separate tip on this.

 

Take care with self assessing a CGT event. I have seen many trustee loans that were not validly settled and agreed and it may be a dubious claim subject to penalties. eg Was there a legal obligation to repay INCLUDING interest and was this evident at the initial time ? A Money lending activity could also have different outcomes

 

Thanks Paul. I will definitely not self-assess. Still waiting on the final outcome of the voluntary administration (which is such a stressful time and don't wish upon anyone).

In the meantime, I'll watch and learn from your youtube channel

 

VA isnt sufficient to w/off a loan. A liquidator must make a final determination of no further distribution so that a loss is confirmed. That could be way off. It would likely depend of secured and unsecured creditors and what assets exists. Thats the role of the administrator to report if sufficient assets exist and the entity can trade out etc. If they dont see that then they may recommend insolvency commence by appointing a liquidator. If there are tangible assets (eg property) its more probable that a trading loss will result and some degree of partial payment may occur since assets may be less than liabilities. Unless thoroughly mismanaged there should be some assets recoverable (ie property) v the debts

 

Reading through the contract....the trustee loaned the money to the property developer company. If the company is liquidated and returns no money, is that still a capital loss to the trustee? Or is it a bad debt?

Thanks. This is a very good learning lesson. A bad lesson, but a lesson never-the-less.

 

Possibly. However rules concerning money lenders could affect that. TR92/18 should be considered.

When a trustee LENDS money they may be a money lender and the issue is whether it is a CGT or revenue event. A tie breaker test will lean towards it being revenue NOT a CGT issue if it is both. But also consider whether money lending applies. many taxpayers leap to CGT issues when tax law for revenue losses is far older than CGT events. CGT events are a modern tax issue and loans existed long before CGT.

The question of whether a taxpayer is carrying on a money-lending business is a question of fact. For the purposes of paragraph 63(1)(b), a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it.

1. There must first be a loss
2. Then seek tax advice specifically

 

TR92/18 was useful and made sense, except for "The bad debt has to be written off in the year of income before a bad debt deduction is allowable under section 63". I didn't understand what that meant.

I'll probably be calling you for an appointment once a loss occurs (could still be months away), that is assuming you still accept new clients.

 

How did the trustee get the money in the first place?