Would this equity loan be tax deductible?

I want to buy a 2mil IP under my family trust. I am the sole trustee.
I would like to draw out 500k of equity from an unencumbered property (owned in my name) to use as the deposit.

Is the 500k equity loan tax deductible? What would be the most tax effective way to do this?

 

no.

I recently obtained a private ruling on this and the ATO's opinion is you will have to enter into a complying arm's length agreement with yourself as trustee - even though such an agreement would at law as you cannot sue yourself. They see trusts as different tax entities.

 

why family trust and why sole trustee?

 

A family trust as I'm a PAYG worker in the highest bracket. I'd like to be more efficient with amount of tax paid by my investment properties.
Sole trustee as I want to make my wife one of the beneficiaries as she's only works part time in a much lower bracket. No kids yet.

A family trust should achieve the above. The problem I'm trying to wrap my head around is how to actually borrow money and keep the interest tax deductible. Sounds like it wouldn't be so I'd have to weight up the potential income tax saved vs interest that's now not deductible.

Definitely keen to hear if anyone else has done something similar or had a better approach.

 

Will the property in the trust have a net tax loss?

what other types of trustees have you considered other than yourself as individual?

Assuming you will have kids in the future, how does estate planning fit into this? Do you understand how a family trust is not part of your estate?

have you talked to a lawyer about all of this?

 

Legal Tip 318: An Individual Lending Money to a Trust of Which they are the Trustee

Ha Terry has a tip for everything.

 

State - Land tax ?

Assuming you are seeking to borrow 100% of the property cost the use of a disc trust may be a poor choice. A neg gearing loss may occur and it would be trapped in the trust. A unit trust could be smarter as most of the loss may then assist you and not be quarantined in the trust. However the trust cant have you as sole human trustee for the borrowing problem and also a complex legal issue if you are also the unitholder. Such trusts can be a ticking time bomb if poorly structured. This is a area of advanced tax planning.

 

see
Tax Tip 367: Borrowing and Onlending Money to yourself as Trustee and Tax

 

Enter into a documented loan agreement from yourself to yourself as trustee to prove the intention with interest on charged.

Make sure you enter into a fresh drawdown on the loan and have a split facility so you can trace the monies separately.

your family trust might generate a tax loss from the property so you should have a strategy for the trust to use that loss.

just needs a bit of care and doc prep for it to work. That should be part of a larger strategy.