Hi guys
I’m considering the following scenario:
I draw some equity out of a property I own and lend the money to a discressionary trust that I contol. The trust uses the money in conjunction with a margin loan to invest in a high yielding share fund.
The distributions from the fund are used to make the interest payments on the margin loan, and also to pay me interest on the money I lent to the trust (at the same rate I pay the bank). I claim the interest paid to me as income, and claim the interest payments I make to the bank as an expense incurred to generate that income. My net profit is nil so my tax position isn’t affected.
The profit left in the trust after the interest payments are made is then distributed to the benificiary of my choosing.
Can anyone see any issues with this set-up?
Cheers,
CarlHi Carl
Common trap for young player, as the interest at your personal level is not deductible.
Look at a HDT to overcome.
Regards
Tonycorrect me if I’m wrong, but if I use a unit or hybrid trust and buy units, then when the trust uses the money I paid for the units to buy an asset all the income the asset produces have to be distributed to the owner of the units. That would mean that I can’t distribute the profit to someone else… Is there a way around that?
Hi Carl
Thats why they are called hybrids. You might think they should act like that but they can act in a different way. Sound too good to be true? Time will tell, but to have a better argument with the ATO if they come knocking on your door down the track it would pay to get a private ruling from ATObefore entering the transaction.
Regards
Tony
Profit distribution is at the Absolute Discretion of the trustee in a hybrid trust.
CATA
Asset Protection Specialist
[email protected]Thanks for your input guys.
Ok, so this is how it would work then, in theory:
– I borrow 10k, buy units for 10k in the HDT
– margin loan size is 10k
– lets imagine funds yield $2000 for the year
– $800 is used to pay interest on margin loan
– $700 is distributed to me which I declare as income and use to pay the interest on my loan, which is then tax deductable (as I can prove that I used it to generate that income)
– the remaining $500 is distributed to beneficiary of my choosingFor the purpose of this excercise lets imagine there are no gapital gains to consider..
Originally posted by tonyy21692:Hi Carl
Common trap for young player, as the interest at your personal level is not deductible.
Look at a HDT to overcome.
Regards
TonyTony,
Not sure what you mean by this.
Carl will be borrowing from his bank and lending money to his trust. The trust will pay him interest. This is income. However Carl has a cost of paying interest, and this will offset the income he receives. Net result is nil for Carl, with the trust claiming the interest.
Carl
Your strategy sounds alright by me – but I am not an accountant.
Terryw
Discover Home Loans
Parramatta
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Hi Terry
Carl said
“Hi guys
I’m considering the following scenario:
I draw some equity out of a property I own and lend the money to a discressionary trust that I contol.”
As soon as I hear this warning bells go off. Two reasons. Firstly case law is very clear on this matter. Secondly, methods to circumnavigate are costly (legal fees and stamp duty) and most clients just pay lip service as they cut corners due to our self assessment system.
Carl could always get a private ruling from the ATO.
Regards
TonyTony
Not quiet sure what you mean, but have a look at this post:
https://www.propertyinvesting.com/forum/topic/20340.htmlBTW, a friend in the ATO once said apply for a private ruling is like waving a red flag at a bull.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.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
What can I say, some people will just never get it.
A private ATO ruling, based on the facts of the transaction is a cheap insurance policy for those who seek certainty. It turns opinion into fact.
Regards
TonyOriginally posted by tonyy21692:What can I say, some people will just never get it.
Maybe you should look at from Terry’s point of view. Why close a loophope if it is not necessary?
CATA
Asset Protection Specialist
[email protected]
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