Using an LOC to purchase via a Trust

Brains Trust

My PPR is set up with a CBA LOC for the purpose of putting deposits on IPs. The interest on this LOC is tax deductible.

If I purchase an IP using a discretionary trust I've set up will the interest still be deductible? ie the PPR is in my name but the IP is in Trust's name.

Thanks

 

Who is trustee?

 

It can be. You'll need a formal loan agreement between you and the trustee of your trust to loan the funds from your LOC to the trustee. If you are the trustee of the trust you won't be able do this.

Hopefully you haven't been mixing the LOC with multiple deposits for IPs. It can create problems later too. @Terry_w wrote a few tips on this subject. It might pay to have a read through them.

 

Sometimes a unit trust may be a alternative and avoid neg gearing losses in the trust and also reduces some of the loan to trustee hurdles. Depends on state and a number of factors.

DT owns a share of the UT and / or individuals ?

 

Thanks gents. Its set up as xyz no.1 P/L ATF xyz no.1 trust, and I'm the sole director

 

In that case you would need a written loan agreement between yourself and the trustee xyz no. 1 Pty. You could claim the interest that you pay the bank if the trust pays you interest at a commercial rate. Trust could claim the interest it pays you.

 

If you borrow personally to onlend to the trustee then its a zero sum game for you. If you use savings and it produces a tax benefit that benefits another person through the trust could be a scheme. (Its well described in the hybrid trust rulings)....
Otherwise its then deductible to the trust...Does it create neg gearing ?
If so may be a fail for the loss as its trapped in trust. If you engineer the rate to make it zero sum net income for the trust then the loan fails commerciality and is all non-deductible.

If the loan is not maintained on arms length basis its a non-recourse loan and perhaps non-deductible too.

Message...take care get advice.

 

Is it ok if the i/r of the loan to trust is set at the same rate as the LOC? There's no tax advantage.
It's just trying to get capital into the trust (as it is harder to get a loan for the trust). Is that ok?

 

Just so your clear the onlent funds will be deductible to the trust and not to you. If a DT the losses will.need to be carried forward.

If it has profits then no issues.

You wont get any gearing benefits in your own name under this arrangement.

Also beware of land tax for DTs in Vic and NSW. The land tax costs generally outweigh many benefits.

 

Depends what you are referring to. From a general legal point of view you could lend on any terms.
From a tax law point of view the point has been raised that this could be an noncommercial transaction unless your terms are the same or similar to that of the bank - first registered mortgage etc.

Seek specific advice.

 

Bank --equityloan125konPPR--> me --loantotrust$125k--> DT (beneficiary me) (because DT hard to borrow from a bank)
Bank <--bankinterestrepayment/homeloanrate-- me <--interestrepayment--- DT

So,
- can I deduct the interest expense on my equityloan from bank against interest income from the trust - income neutral and presumably tax neutral?
- can the trust deduct the interest expense off its rental income?
- given that i rates to trusts will be higher than a home loan rate, is setting the rates the same considered non-commercial? @Terry_w
- is there a better way to do this? I am just trying to get finance for a trust so that it can have a 20% deposit. And 80% from the new secured IP.

 

1. Most likely yes. Assumes that the 20% was correctly documented and settled.
2. If the 80% loan is documented and settled to acquire the property by the trust. DIY concerns often are evident when shortcuts are taken.
3. Is the trust neg geared for tax purposes ?...If the trust borrows 100% I would argue you have losses quarantined in the trust. A different trust may avoid that..

4. You didnt mention land tax.
5. Does your 80% lender lend to trusts ? Costs, legals etc ?
6. In event of your death how is the trust affected ? Life insurance adequate ?

 

I am not aware of your loan terms so cannot comment.

Would you lend me the money on the same terms as you would to the trust?

 

id never lend money to @Terry_w

 

What if the loan terms are duplicated?
If the loan to the trust is at a higher rate, what are the implications? I make a profit on myself and my personal taxable income increases proportional to increase in interest income?

 

3. Planning to be postively geared.
4. It's my first investment so I don't think I will reach threshold?
5&6. Yes, I have to check that. Do you think the asset protection of a trust worth a lower LVR and higher interest rate?

Thanks for all your answers and also @Terry_w so far. Much appreciated.

 

Are you able to duplicate the loan terms?

 

I don't think you have much to worry about even where the loan terms are not as strict as the loan with the banks. But it is something to consider.

 

thanks!

In terms of duplication I was just thinking same i rate, same repayment period. Just don't want to getting taxed for the privilege of earning money off myself.

 

one more question. If not through a loan, what other ways can a trust get the 20% deposit? Through a gift?