Good morning all,
This is my first post and I am setting up for my next IP purchase. I have a PPOR and IP presently in my name and have recently set up a family trust with a corporate trustee for my future purchases.
My question is surrounding how best to get funds into the trust.
My understanding of the tax law is that it is the purpose of the loan that dictates the tax deductibility of interest payments, so my questions:
1) if I redraw the equity built up in the IP loan to put into the trust is that considered investment purposes so that I can claim the interest as a deduction in my personal tax? Or
2) is it dependant on ‘how’ I deposit the funds be it a gift to the trust or as a loan to the trust?I am assuming banks etc would prefer that the money lands in the trust by means of a gift so that there is no financial commitment to the trust to repay the loan and the trusts balance sheet looks stronger.
Thanks & I look forward to anybodies opinion who has come across this issue before.
Thanks – Eamon
Hi Eamon,
Generally, you can loan money to the trust, and the trust will have to pay you interest. So, in your personal tax return, you will have an interest deduction for themoney borrowed, and interest income from the trust.
If you loan money to the trust and don't charge interest, you can't claim the interest, as there is no nexus between the interest deduction and the income.
The trust also gets a deduction for interest paid to you.
The money woiuld have to be loaned, not gifted, to the trust.
Interest on money borrowed to 'invest' into a discretionary trust is not deductible as because the trust is discretionary so there would be no guarantee of a return. (compare this to a unit trust where there would be a fixed percentage).
As Dan said you can either gift or loan and each has different consequences in terms of asset protection and tax. A loan is returnable so it is always your money. A gift is not, but it may still be at risk if you were to go bankrupt as it could be clawed back.
If you are using redraw (watch out for mixing loans too) you would generally on lend to the trust at an interest rate equal to what you are charged. The net result is your income from interest = the interest you pay and so your personal tax position remains the same and the trust ends up claiming the interest as a deduction. If you want to charge less then your claim may be deemed to be non commercial – why would you borrow money and lend it and make a loss. If you want to charge more you will be draining money from the trust to your personal income – which may mean more tax.
You could redraw and gift to the trust – but then you couldn't claim the interest.
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
Thanks for your comments – it has certainly added some food for thought.
Cheers – EKG
You must be logged in to reply to this topic. If you don't have an account, you can register here.
