Zen1,

I’m no accountant, but my understanding is that no, you can’t claim interest deductions yourself for an IP in a standard discretionary trust.

As far as I know, the only way you would be able to do so would be to lend the money to the trust at the same or higher interest rate as you borrowed it, which would normally be pointless.

I’ve seen other messages discussing the possibility of converting a standard trust to an HDT. You might like to enquire with a trust specialist about the possibility of doing that.

GP

Paul,

I can’t answer your questions, but what you’re describing sounds like a testamentary trust. Ask your advisor about them.

Cheers,
GP

As has been stated in the other thread, losses in any type of trust cannot be distributed and thus cannot offset any individual’s other income (not even the trustee’s).

In the other thread you said the loan was in the trust, so what funds have you put in by buying units?

GP

Terry,

An interesting point. I wonder though, since the loan was used to purchase units even though it’s secured against the IP, if the IP could be sold and the capital returned to the bank without the units being redeemed. I would think (or at least hope, as a unit holder) that there’d be a tie between the injected capital and the units that were purchased with that capital. Otherwise, if I purchased units with my own funds (ie. not borrowed), it could be a worry if the trustee could then just go and distribute that capital elsewhere and leave me with units in a trust with no funds.

Also, by my understanding, a unit holder has a right to all income from the assets purchased with the unit funds. Therefore I don’t think the trustee can just decide to distribute that income discretionally. I would imagine a bankruptcy administrator might hound the trustee through the courts if they did that.

GP

And perhaps more importantly from a diversification point of view, every day has its dog.

GP

You don’t need one, but it adds a layer of asset protection in case the trustee gets sued.

GP

A hybrid discretionary trust can be used for negative gearing property so that an individual can offset the interest losses against other personal income.

It also gives the benefit of being able to distribute capital gain to different beneficiaries (ie. those on lower incomes).

And there are trust loss provisions that don’t allow trust losses to be carried forward unless a family trust election is made – which then has an impact on who can receive distributions at lower tax rates.

GP

Depends on what sort of bank account you put it in, whether term deposits are acceptable, and how much risk you’re willing to take.

For at-call online savings accounts, the last time I looked the best rates were around 5.25%-5.4%, or 6% with BankWest for the first year. Term deposit rates probably higher if you don’t mind a longer term. And if you don’t mind more risk, you’ll see places advertising rates of up to 10%-12% – but these are not banks and the money is unsecured.

Take a look at the rates on Cannex:

http://www.cannex.com.au

GP

Just an update after having had a long discussion with someone from the ATO’s foreign section. I have to say though that the person concerned wasn’t right up with these rules himself, and actually stated that this was the first query they’d had on this topic for a couple of years. For much of the discussion he was reading and interpreting the tax act as we went.

However, the primary points were:

If the trustee was at any time resident in Australia, or the trust was at any time controlled by an Australian resident, then the trust would be deemed Australian resident for tax purposes.

If the trust was considered a non-resident trust for tax purposes, then the transferor trust rules would apply except for specific exemptions. In relation to that:

– Lending money to the trust (for deposits) would be considered a transfer of services.

– Paying off a loan to a bank, where the loan was used to purchase property in the trust, would also be considered a transfer of services (assuming loan repayments were coming from the Australian resident and not entirely covered by trust income).

– Lending money to the trust, even at commercial interest rates, would not be considered a transaction in the normal course of business, as the individual would not be in the business of lending money (which is a regulated activity in Australia).

– One thing he seemed particularly vague on was whether the investing itself would be considered a business. He seemed to think that if the trust had enough properties then it might be considered in the business of property investment. However, how that would affect the previous point about lending money to that trust, I don’t know. That also raises questions with the definition I quoted earlier about eligible business transactions, where that rule seems to require having other customers or clients for a transaction to be considered eligible.

– Irrespective of being considered a transferor, if all income and gains were distributed to non-resident (of Australia) beneficiaries, then there’d be no attributable income. Thus if capital gains could be distributed to NZ beneficiaries then they would not be counted as attributable income.

– The last point however doesn’t really matter, as even if the property was owned in an Australian resident trust, if all income and gains from the property were distributed to non-residents, then they would also not be taxed in Australia. There are special rules about foreign-sourced income being distributed to non-residents. The only real difference is that the Australian trust would have to file a tax return in Australia whereas a NZ non-resident trust may not have to (if it didn’t souce any income from Australia).

– In relation to an Australian resident controlling a non-resident discretionary trust, his interpretation of that seemed to be much the same as mine. If the Australian resident or his associates appeared to have any influence at all over the trustees, (s)he would be deemed to have control. Associates explicity includes other family members, and would almost certainly include non-residents with whom they’d had business dealings in relation to the trust (accountants, lawyers, etc).

In the end though, the onus of proof with any of this stuff would be on the taxpayer. The ATO could simply state the rules apply and it would be up to the taxpayer to put forward a convincing argument that they don’t. If the ATO weren’t convinced, I guess it would ultimately only leave arguing it out in court.

The information provided by this person from the ATO was only for informational purposes and is not binding or advice or any kind. Given how vague he appeared on some of the issues, I’m not sure that his interpretation is any more meaningful than anybody elses. Consequently, I think professional legal advice would still be necessary, rather than relying on anything stated here.

Cheers,
GP

Hi Chris,

Without knowing exactly what you’re doing, I can’t comment on that further. However, you may be interested in the tax act’s definition of what constitutes an eligible business transaction in relation to transfers to non-resident trusts. This is from the tax act 1936, part X, division 2-C, section 346:

And in relation to other (ie. non-business) arms-length transactions, division 2-C, section 347 says that an entity is still a transferor if at any time after the transfer they could control the trust (according to the broad definition of control I quoted earlier).

In the end, of course, it is up to the individual concerned to satisfy for him/herself that any arrangement entered into complies with the appropriate tax laws.

Cheers,
GP