Hi all
My question is in relation to transferring money from personal account to a trust account and the subsequently transferring the same amount of money back once the trust becomes profitable. How would ATO view such transfer?
To use an example:
1. I have a personal account with 100K cash, which can be used to buy an IP.
2. But I setup a family trust and want to buy the IP using my family trust rather than under my personal name.
3. Now, when the trust is initially setup, it has $0 to start with.
4. I transfer my $100K from personal account to Trust account, and use my Trust account to pay for an IP’s deposit.
5. Later on the IP increase in value and the Trust sells that IP for an 100K profit. So this means the Trust now has 200K in it (the original $100K that was transferred from my personal account and the $100K profit from selling the IP）
6. I need that 100K back in my personal account for my personal use (such as I need to pay my son’s school fee), so the Trust returns that $100K back, since the Trust now has $100K from selling and that $100K is enough for the Trust to make the next investment.So how would ATO view the transfer of 100K from Trust back to my personal account? Are they going to tax me for that 100K transfer back and forth? If so, what can I do to not have to get taxed for such a transaction?
ATo are only concerned about deductibility of interest.
Transfer of cash generally doesn’t trigger tax.You should consider the legal effects
– is it a gift or a loan?
– how is it documented?
– if a loan what is the interest rate?
– limitations act
– who the trustee is
– what happens if you lose control of the trust?
– what happens if you die?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
I am not sure when it comes to the time for the trust to return those cash to my personal account, is ATO going to see this as “oh, that’s a huge amount of income this year, so pay income tax please”.
Regarding to gift vs loan… essentially I am “lending” (if this is even the right term to use) money to my family (in the form of a family trust), so it makes every little sense for me to charge my family interest.
Just like when my parents lend me money to pay for a school fee and later on I return that money to my parents… my parents being my parents, they therefore off course will not charge me interest, and I fail to see why government will be so upset about my parents not charging me interest.
If government insists that “a lending must incur an interest no matter if it is a lending from one family member to another such as you lending money to your own family trust”, then is there a minimum amount of interest rate the government insists we must use?
The trustee is again, a corporate trustee with me and my wife being the direction / shareholder.
Stupid question from me here, but can you explain limitation act?
movement of capital from a trust doesn’t in itself trigger tax. Only if it is income or capital gains will it trigger tax – consider stamp duty too.
If you have lent money to the trustee how is this documented? Is there a written loan agreement? If this would would have the terms of the loan. If not it is an oral contract and this will cause various issues.
Why do you think the government will be upset?
Why do you think a lending must incur interest?Limitations act is state based legislation which says an action cannot be brought after a certain period of time. e.g. if you make an interest free loan to me and there is no movement for 6 years you will be unable to sue to recover – nsw law.
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
Ahhhh.. I see
I think that clears up my questions.
Regarding to loan document, who can give me advise on that? Accountant or Lawyer? If Lawyer, what sort of Lawyer I should go to?
Only lawyers can draft legal documents. Most lawyer should be able to assist with a loan agreement.
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
OK, Can I just download a generic loan document template (there are plenty online), and get both sides to sign it upon both sides happy with the content?
perhaps, but consider what the consequences could be.
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
I don’t have any financial qualifications so please ask your tax advisor to clarify. My understanding is that the $100k transfer from your personal account to the trust would be identified as a directors loan in the accounting software. In your accounting software, it then ‘sits’ in an account (not a bank account,.. an account set up within your software) which registers a liability (=-$100,000). When this is paid back, the journal entry should specify that the directors loan has been repaid.
Should you get audited, you will be able to demonstrate the money that went in to the trust from the director and back out again to the director.
It needs to be paid back to the director when this is due. This is, of course if your trust is set up with a corporate trustee and you were the director of that entity.
It all gets a bit complicated, so it really is worth sitting down with your accountant and asking them to explain it to you. I am not a financial advisor and the above may well be wrong.best to not let an accountant decide whether a transaction is a loan or not.Take some tax advice and then get legal advice on the consequences plus how to record things. Mere accounting notations are not enough.
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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