Investment property in a trust - tax related questions

I have some tax questions on accounting for certain expenses paid for as trustee on behalf of my trust.

I purchased property in the following structure:
Family trust - I am the sole beneficiary
Company Trustee- I am the sole director and shareholder.

My trust deed has a clause on renumeration of trustee. For business transactions and acts done as trustee the trustee is entitled to remuneration blabla... the trustee shall pay out of the trusts capital or income all costs and expenses of administering the trust.

I took out a loan as director of the corporate trustee on behalf of the trust for the property itself.
However I also took out a 2nd mortgage on an investment property in my own name to use as a deposit for the property purchased for the trust.

1. With the interest accrued/paid on this mortgage in my own name - I'm assuming I need some kind of on- lending agreement for the trust to pay or reimburse the interest and then claim this as a deduction in the trusts tax return?
(Or do I actually need an agreement- can I just use the renumeration clause in my deed to claim this expense from the trusts income. And how would I account for this in both my personal and the trusts tax returns. Would it just be as an expense in the trust tax and that's it. Or would it be an income and equal deduction in my own tax as well)

2. The initial ASIC registration fee - technically created before the trust but created with sole purpose of administering the trust. Can this be claimed, if so where/how? Could I claim this as renumeration for expenses incurred administering the trust? Same with the annual asic fee? (Also the cost of the trust deed itself?)

3. If I "loan" rather than gift all the funds the trust needed for purchasing the property
a) if the trust were to eventually draw equity/increase mortgage to repay this - are the interest charges associated with that tax deductible?
B) what, if any, are the tax effects of the trust repaying me/the trustee the money I lent it? Im assuming there should not be tax associated with this as its repaying a loan owed to me rather than being income? (No interest charged other than the interest in question 1)

 

I think you neeed some legal advice as to why that structure.

It may seem that you're holding assets "in trust" for yourself as beneficiary and are also appointor.
Which means there could be no trust arrangement.

 

It is a legal and common trust structure - the trustee is a registered company - not me as an individual. Already got legal advice on this.

 

What was the purpose of this structure?

 

Hi - I am not seeking any feedback or comments about the trust structure, only about accounting for the taxation/etc of both the trust and the trustee's expenses incurred on behalf of the trust.

Please only respond if you have answers to the taxation questions thankyou.

 

You can't be.

This would be unusual. Did the company take out a loan or you? Who is the borrower?

Definitely.

Trust would claim it. You can't claim anything.
Legal fees to establish the trust are covered here:
Tax Tip 164: Deductibility for Costs of Setting Up a Trust Tax Tip 164: Deductibility for Costs of Setting Up a Trust


generally not deductible

If the trustee borrows to repay this loan it is a refinance and generally wouldn't change deductibility of interest. But it depends on the circumstances around the loans.

No tax benefit directly, but you have lent someone money which you should get back asap generally and then can redeploy it somewhere else. You could improve your serviceability, tidy things up from an estate planning perspective etc

 

Thanks for your reply

Regarding the first point that you say I can't be the sole beneficiary - what is your reasoning for this?
Person A cannot be both the sole beneficiary AND sole trustee of a trust.
But Person A can be the sole director of a company that is the trustee of a trust, and person A can be the sole beneficiary of that trust as they as an individual are not the trustee - the company is. It is an extremely common trust structure. Should properly refer to it as a discretionary trust rather than a family trust.

Probably didn't explain that well. The loan agreements go something along the lines of "Company name" in its rights and capacity of 'trust name'

Thanks. I'll have a look

 

and check this one too
Legal Tip 371: You are Not the Only Beneficiary of that Discretionary Trust! Legal Tip 371: You are Not the Only Beneficiary of that Discretionary Trust!

 

Ask your accountant as you will get confused with all the noises here...

 

Jess - You can expect a range of responses and cant cherry pick. Note none are personal tax advice. Asking a question on a forum is like shouting out a question on a bus. Some may be very helpful but wrong and others plainly incorrect or off topic and others are general helpful information. The issue is also who responds and their experience and qualifications - But they are anonymous. All your questions are best given personal tax advice. The loan one is a major one.

Also I hope you are aware that a trust should NEVER just prepare a tax return. It can be fatal for tax purposes. Proper accounting ensures the nature of the trust is consistently reported (a legal obligation as well as tax) and that income is correctly calculated

 

Could you please explain further what you mean by this?

 

Is the trustee required to appoint an accountant to prepare financial reports and financial statements? Many deeds have this requirement and a trustee not doing it would be breaching their duties

 

A trust must HOLD assets and may have liabilities. The net assets of the trust must be accounted for. And then on a annual basis the income and expenses and changes in assets and liabilities etc. It is a fundamental elemnet of trust law. The ATO expect trusts to account. So does any court etc. It can be argued no trust exists if there is no accounting. Hard to defend. The financials determine the trust income and expenses. Tax reporting is a after thought / consequence of that process.

Same with any entity like a company. Directors are accountable to shareholders. In a trust the trustee is subject to the beneficiaries.

 

Thanks for the explanation. My accountant charges ~$500 to do a trust tax return, and a separate $600 or so to do trust book-keeping. I am assuming everything you mentioned is covered in the book-keeping service.

 

Why assume? As trustee you have a duty to know this sort of thing. Are there balance sheets and profit and loss statements prepared?

 

I meant that I assume the explanation Paul gave is defined by the terminology/service called "book-keeping".

In the first meeting I asked the accountant whether it was necessary to engage him to do the book-keeping for $600. He said it is not necessary as long as proper records are being kept. I showed him the records I was keeping and he said what I was doing was sufficient. I changed accountants and had the same conversation with the same result.

The deed says "Trustee must establish and maintain proper books" and "ensure financial statements are prepared at the end of each financial year by appropriately qualified accountant, unless determined otherwise by the Trustee." Then it goes on to list items that need to be reported on, income, costs, investments etc.

The trust use is just buy & hold index shares atm so it's not complicated. This financial year I may do the tax return myself too.

 

I suspect you refer to ETFs not shares as there are no index shares on the ASX. The ETF income paid aftre 30 June does need to be accrued. The tax elements can be complicated and some elements affect the trust assets and CGT records. I wouldnt recommend DIY for such cases. I also assume you know the approporiate way to prepare trust resolution/s and consider streaming and divergenace between accounting and tax outcomes.

 

Yes ETFs. Understand DIY is not recommended. Yes trust resolutions are being prepared. I am not sure what you mean by "streaming and divergence between accounting and tax outcomes". I will talk to my accountant about it.

Thanks for the comments. I was trusting my accountant was giving me the right advice about this but if it turns out he hasn't I will be switching accountants immediately.

 

AMIT amounts in trusts are very normal. Its not trust income. Its a reduction or increase to costbase affecting future gains and losses.

Just doing one with 14 trusts all with AMIT. The accounting income v tax income are quite different. Many accountants dont do it but I dont add the AMIT into "income" but reduce the costbase. Even then accounting v tax income isnt same eg Dividends and franking is the most common. Use of tax losses eg C/fwd CGT losses is probably common too

 

So I spoke to a new accountant (no. 3) who also confirmed that it was not necessary for them to do the book keeping for the trust, what I have been doing is adequate.

Regarding AMIT, the values required to be input into the trust tax return is listed on my Vanguard member annual tax statement for VAS ETFs. From what I can see, my accountant has simply plugged those values from the statement into the eTax system (he actually got them wrong and I corrected them). So this is why I am thinking I will do the tax return myself. By the way I don’t mean to play down accounting at all. The Trust/ETFs barely earn an income so I am only trying to learn how it all works so I can do things myself and save money for the trust until it has enough cash flow to pay for more services.