Hello Everyone!
This is my first time on the forum so please excuse me if my question doesn't make sense!! I've read a few posts on this already so I'm learning more each day!
I'm about to buy a property through my family trust which has a company as trustee – non trading company.
80% the company will borrow and 20% I will lend to the trust. My 20% will be from a LOC.
My question is – should I loan the 20% or gift the 20% to the trust? I was thinking that if I gift it to the trust, then the trust won't have to pay interest back to me therefore not having to take up the expense. The only interest it would pay would be on the 80% it borrowed under the trust name.
This will then give the trust income instead of making a loss. ( isn't that what you want a trust to do?)
Alexia
If you gift it then you cannot claim the interest on the LOC. This will mean you are paying interest and won't be able to claim it.
A $500,000 puchase price would mean a $100,000 gift. That would be $7000 pa interest!
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
The interest from the LOC which I'm are getting charged would be the same as the interest the trust is charging back to me.
So wouldn't the interest chgs just offset against each other – The net effect would be zero anyway?
Either way charging interest or gifting the money I still wouldn't be able to deduct it from my personal income unless the trust chgs a higher interest rate. By doing this it will reduce any income from the trust, maybe a loss which we don't want. Is this correct the way Im thinking or I've got it totally wrong – Sorry Terry.
This is where Im confused or maybe I'm just missing something.
Alexia
Break it down using Terry's numbers:
1. You gift the money.
You gift $100,000 to the trust from your LOC. Trust takes out $400,000 loan. Your 'gift' costs you $7,000 each year in non-deductible debt. Trust pays interest on the loan, and say makes a $3,500 profit. It distributes that profit and you pay tax on it. Lets say you pay $1,000 in tax, so you get $2,500 net from the trust and have to fund the extra $4,500 from other income (again, you can't claim that $4,500 as a loss).
2. You loan the money
You loan $100,000 to the trust, and borrow $100,000 yourself from the LOC. This costs you $0 net in interest charges, so no profit or loss to you in a taxable sense. The trust however has to pay an additional $7,000 in interest, so rather than a $3,500 profit, it now makes a $3,500 loss. The loss is quarantined in the fund, so it can't be passed through to you for tax purposes. The $3,500 loss needs to be funded somehow, so unless you get fancy, you probably gift that $3,500 to the fund, so it has cost you $3,500 instead of $4,500. Not only that, but you do have a loss that gets carried forward in the trust. This means the first $3,500 profit you make (once rents increase enough, or if you sell and make a capital gain) gets offset against that loss, so you don't have to pay tax on the first $3,500.I'm actually going to meet my accountant in the next day or two to finalize a similar arrangement, so will get more details from him then, but that's the basics.
If you are gifting the money to the trust then you could not claim a deduction on the interest on the money paid from the LOC. A gift is not an investment and will not produce any income or return. So interest on borrowing to make a gift would not be deductible.
If you borrow and onlend to the trust at the same rate then the trust would end up claiming the deduction of interest.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry.
Great feedback. I think charging the trust the same interest rate as you is the way to go instead of gifting the money.
I never thought of it in that way Bjsaust – your example above makes sense!
Bjsaust, let me know how you go with your accountant!
Thanks guys
Alexia
Also think of the asset protection aspects.
A gift is not returnable (but could be clawed back in some instances). A loan is always an asset of the lender.
There is usually a trade off of asset protection v tax deductibility.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
In regards to the asset protection aspects –
If you loan the money it will always be an asset of the lender not the trust but if you gift the money to the trust it no longer belongs to you and becomes an asset on the trust books?
Alexia
Alexia
Not sure what you are asking, but think of it this way:
With a gift its gone forever. With a loan it comes back – even if you go bankrupt it is due back and could end up in the hands of creditors.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
Thanks for your help.
I was just trying to say that if you gift the money to the trust it becomes an asset of the trust.
Alexia
bjsaust wrote:The $3,500 loss needs to be funded somehow, so unless you get fancy, you probably gift that $3,500 to the fundThis was the part of my scenario above I was mostly interested in clarifying. How you handle this shortfall. The advice I received, was that rather than loan just the 20% (in my case my plan was and still is only 10%) to the trust, you loan a lump sum amount on top of that to cover shortfalls. So instead of say loaning $100,000 to the trust in the example above, you may loan $120,000. The extra 20k would sit…well technically it can sit anywhere, but logically you would have it offset in some way against either loan. For simplicities sake, lets say the IP loan by the trust is IO with 100% offset account, the extra $20k would sit in the offset account. So now instead of the trust needing to pay interest on its $400k loan from the bank, and the $100k loan from you, it now needs to pay interest on $380k for the loan from the bank, and $120k from you. So initially the numbers and interest are identical, however instead of you needing to keep funding the shortfall, the trust can just use the $20k sitting in the offset account.
Yes, ideally you should gift or loan a bit extra to the trust to cover any shortfalls for a short period. But I find that many people don't have the spare cash to do so and they end up transferring cash each month. This is not ideal as it looks less like a separate entity then and more an extension of the individual.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Guys,
Bjsaust, thank you explaining that to me. It makes more sense to loan that bit extra to cover the shortfall. Like Terry said it would be a better option.
Can you get an offset account attached to the 80% loan which is under the trust's name? The 80% loan under the company name would be treated as a business loan? Do bank's allow offset accounts to business loans?
Sorry for the late response guys.
Alexia
Yes you could get an offset account on a trust loan.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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