Family Trust Confusion

Hi Luke

You have had some bad advice there.

Bad on 2 accounts:

1) loans
If your trust is going to be the owner of the property, then it is the trustee's name on title. ie Your company will be the legal owner. So to get the loan in your name would mean the bank would need to lend the money to a third party. This may have been achieveable with some banks in the past, if you were the director of the company, but it is extremely difficult now.

2). Tax
You say you have a family trust. I assume this is a discretionary trust. If you were able to borrow the money in your name, you then have to overcome the hurdle of making the loan deductible. If you were to lend the money to the trust you would be charged interest, and you should charge your trust interest as well, at commercial rates too. But the interest received would cancel out the interest paid. net result is nil.

Another hurdle is that if your trust is discretionary, then there is no guarantee that you will get any distributions. The trustee has absolute discretion. So if you were able to lend your money to the trust with the trust not paying you any interest, you would have no grounds to claim the interest as there is no guarantee of any return on the money invested – ie it is commercially unviable.

If later on you have built up some equity in your PPOR and you get a LOC and onlend it to the trust (eg for the trust to use as deposits) then this is ok. the trust would pay you interest (income) and you would claim the interest you are charged. so net result is the trust claims the interest.

Maybe you were thinking about unit trusts.
With unit trusts each unit hold has a fixed entitlement, so it is possible to borrow to buy units in the unit trust, but still difficult to get a loan for this. It is also possible to tax deduct the interest on funds borrowed to buy units, but it has to be set up correctly.
If you had a unit trust, then you

Luke get advice from Chan & naylor re their Property Investment Trust(PIT) specifically designerd for property investment and nothing else.

It can be done with the unit trust, you can borrow to buy the units and personally claim the interest, but this leaves things very similar to buying in your own name anyway.

If may be difficult to borrow the money in your own name unless you use your own property as security. It is difficult to borrow in your name if the company is the owner as this will be 3rd party lending.

But, assuming you can, and you charge your trust more than you are paying, then you will be making a profit and diverting money out of the trust into your personal income. So you pay more tax

If you charge your trust less, then you probably cannot justify the claiming of interest as it is not commercial – you are making a loss. And if your trust is a discretionary trust there is no guarantee you will get any return from the trust in the form of a distribution so you probably could not claim the interest at all. This is the problem with claiming interest under hybrid trusts.

The only way you will get a tax benefit from this situation is if the trust is earning other income which it can deduct the interest from. The trust will then receive the tax benefit.

Hi Eddie

Thanks for that. I agree, but ….

If the trust borrows money from an individual the trust would pay interest and the individual will need to declare this as income. So the net result for the individual is + – = 0 and it is the trust that gets the deductions of interest. This is assuming the interest rate is the same for the person borrowing from the bank and the amount charged to the trust.

If the individual was to borrow at, say, 5% and lend to  the trust at 2% the individual will make a 3% loss and this could enable the individual to lose income and reduce tax. But to be able to claim a loss there must be a commercial prospect of obtaining a profit. With a discretionary trust there is no guarantee any one beneficiary would get a distribution (because it is at the trustee's discretion) so the situation is not commercial and the ATO wouldn't allow the deductions.

What do you think?

Thanks

Agreed, Terry, although in practice, we will always on-charge the interest at exactly the same rate. 

If the individual intentionally creates a loss by way of differential interest rates as you described, the interest attributable to the interest rate difference will be taken to have a non-income producing purpose (the purpose is to obtain a tax benefit), which will not be tax-deductible.  In other words, I think we agree on the outcome, albeit we got there via different ways.

Eddie
[email protected]

Sideways to the original question: I have set up a family trust with a company as corporate trustee and now wish to put a positive gear property into the trust. The conveyancer says that a trust cannot be registered as an owner on a title. A trustee is registered on the title. But if the company is the title and Steve suggests not to put a property into a company how does this work? Confused

Thanks for that. Now an overly simplistic query in regards to trusts –
I have set up “X Investments Pty Ltd” as the Corporate Trustee for “ABC Family Trust” in SA. Here are the questions:

1. Which name does the bank account get opened in/which name doess the borrowing?
2. Which name goes on the purchase contract/title deed for the property?
3. Which name do the receipts for rental income, as well as losses (e.g. buyers agent fees, renovation costs etc.) go in ?
4.Which one does the tax return?
5.Does anyone know of any good trust user guides where all of these nuts & bolts details are spelt out in black & white?
Cheers,
Susannah of SA

Susannah,

When X Investments p/l goes to the bank it has two options.

Option one is to set up an account in the name of ‘X Investments P/L’
Option two is to set up an account in the name of ‘X Investments P/L’ as trustee for ‘The ABC Family Trust’

It is important to note ( as others have) a trust is not a legal entity. It is only a structure. It requires a legal entity to enter in to transactions on it’s behalf (the trustee) and legal entities to send its income to so tax can be paid (beneficiaries).

Terry mentions a trust is an entity for tax purposes, meaning it has it’s own tax return – not to be mistaken as a legal entity like a person or company.

Therefore answers to your questions;

1. Bank accounts and lending should be X Inv. P/L as trustee for the ABC trust
2 + 3. Contract and invoicing can be in the company only, or company as trustee (I would include the trust) – make sure you use the trusts ABN if it has one. Only the company name will be on the title and transfer ( as the trust is not a legal entity).
4. The trust has its own tax return. If there is a profit there will be a section at the end outlining which beneficiaries received those profits and how much they received. It will then appear in the beneficiaries tax returns as income.
5. A book? I don’t know of one. Trusts are very simple. If you get the basics right you will understand them – you will still need an accountant for the tax side.

Important.

The trustee can also own asset in it’s own right, or carry on business outside of the trust. If it runs a business out side of the trust it will have it’s own ABN. The best way to know if a company is acting on behalf on a trust is to google “ABN look up” and enter the ABN. This will tell you if the A.B.N is linked to company or trust.

This is why it is important to have bank accounts and lending with company as trustee for trust. Otherwise without have the trust listed on contract or title someone could argue funds are not in the trust but rather owned by the trustee…