Discretionary Trust – With personal loan

Hi

Usually, You would get the personal loan and on lend the money to the trust. You would charge the trust the same interest rate (usually) and would have to declare this as income, but this income would be offset by the interest on the loan you pay to the lender. So in the end, the trust claims the interest.

I don’t think you can personally claim the interest as there is no guarrantee the trustee will give you the income from the trust. ie no link between your expense and the expectation of obtaining an income or profit from it.

If it was a hybrid trust, that would be different.

Check this with your accountant.

ps. That is a big personal loan!!

Terryw
Discover Home Loans
Parramatta
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Superior Tax Solutions in Mt Eliza

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If you have questions about the trust structure, send me an e-mail.

CATA
Asset Protection Specialist
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Terry is correct. If you borrow the funds and gift them to the discretionary trust then the interest will not be deductible to you. Similarly if you borrow the funds and lend them to the trust and anything less than the interest you are paying then again that portion will not be deductible. So effectively you will loose out on interest deductibility for the $120K you borrow.

Sure you could on-lend to the trust but what would be the point. You would receive interest on the funds on-lent and also receive a tax deduction for the interest you pay to the financial institution. So the net result would be zero.

If you established a hybrid trust however (cost is around $1,100 without a corporate trustee – the use of a corporate trustee would depend on your circumstances) then you have a number of options. The trust could borrow the $245K and you borrow the remaining $120K and purchase special income units in the trust. Alternatively you could borrow the full amount and purchase special income units in the trust (with the trustee of the trust providing the property as security). Depends on the projected result (i.e. whether the property will be positively or negatively geared).

You also need to consider what is currently in your DT and whether it is conducting any business activities and therefore whether it would be unwise to include the commercial property in a structure which is exposed to business risk. This may not be the case but I do not know the answer from the facts you have provided.

Gross is right. You need to speak to someone experienced in these matters. Dale Gatherum-Goss is based in the outer suburbs of melbourne and is well versed in these matters. Contact him at http://www.gatherumgoss.com

I think they both use the same deeds. The difference is probably Dale has quoted to include a company as trustee.

Terryw
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Ptn, lets try and work out why your head hurts. I love ‘talking’ about trusts. What don’t you understand?

With a trust, you can have a person (or more than one) as trustee or a company (or I guess more than one company) as trustee.

Whichever you chose will be determined by your risk profile. Trustees can sometimes be sued (eg tenant trips), so having a company can protect the individual a bit more.

With a hybrid, there are units. These units are held, usually, by the higher tax payer. When the loan is taken out, it is taken out in this individual’s name. So they have borrowed the money, not the trust. And they have borrowed the money to buy units in the trust, not to buy the property. The trustee allows the trust property to be used as security.

At tax time, the individual claims the interest, not the trust. They can do this as they have borrowed to buy units in a trust. The trust then provides them with an income (from the rent), that justifies this transaction. The distribution from the trust may not be enough to cover the interest, so the individual may make a loss which can be offset against their other income.

Trusts cannot distribute losses, so this is a way around that, and effectively allows negative gearing to occur in a trust.

Hope this helps

Terryw
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Not all deeds are the same. I use Lawcentral myself, but not bought a hybrid from there. And that price doesn’t include a company.

I have seen a few hybrid trusts without companies as trustees So, it can be done. Maybe Dale doesn’t recomend it.

I think Westpac will have a problem with hybrids. They don’t really like trusts at all. But many other lenders will lend, including bankwest, and St George.

Not sure on the land tax issue.

Terryw
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A company trustee is by far the safest way to go for asset protection.
I know brokers who think they know how to do it but still manage to get it wrong, so find one who uses a hybrid trust themself and check them out.

CATA
Asset Protection Specialist
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