Hi there,
A few weeks ago I submitted a forum topic – I was enquiring to the feasability and legitamacy of setting up a Discretionary Family Trust, that still enabled neg gearing against your personal wage, and still includes the other benefits of neg gearing, and not quarantining losses in the trust, here's further advice I was provided by my CPA on how its done……
" answer to your questions below,
1. The money that you borrow from the bank is invested in the family trust. The purpose of this investment is to earn a distribution from the profits of the trust, hence the deductibility of the interest on the funds borrowed.
To illustrate the point, it is quite allowable for you to borrow money and invest it in a public offer managed fund. If the intention is to earn a distribution from the fund then the interest on your borrowings would be deductible.
The only different fact in your case is that the trust is a closely held trust. Providing that your intention is to derive distributions from the trust, and that these distributions are made in a fair and proportional manner, then, the two examples are the same.
2. The profit earned by the trust is not "quarantined" in fact if a trust makes a profit, and in your case this is more likely than not, the the trust is required to distribute that profit. Only losses are carried forward in a trust to be offset against future profits.
3. As with all negative gearing senarios, your investment is a loan to the trust, with the intention of deriving a regular distributiono of income and potentially, capital gains in future years.
I trust this helps to make sense of it all.
Please remember that at the end of the day, you should only follow advice if you are completely comfortable with the process, legality and structure of it. I know this is a suitable strategy for you which is why we recommend it, however you need to be comfortable with it as well. "
What are your thoughts people???? does this sound OK
R's
GavsamVery very interesting. Hey was your accountant OK with you posting his privately-commissioned advice on a public forum?
Jacqui Middleton | Middleton Buyers Advocates
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Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
I stand by what I have said previously, that you can not claim a deduction for money invested in a discretionary trust.
A managed fund is a unit trust. You borrow to buy units in the managed fund, so the deduction in your own name is for the purchase of the units. If you had a closely held unit trust, then you could claim the deduction.
But you are ot purchasing any units or income stream when you loan money to a discretionary trust. You are not entitled to receive any income from a discretionary trust, the distribution is solely at the DISCRETION of the trustee, which is why no deduction is allowed. It doesn't matter if your intent is to derive income, if the trustee doesn't want to give you any income, you don't get any. It's your bad luck and you have no recourse. This is much different to a unit trust or managed fund, where the purchase of the units entitles you to receive income based on your unit holding.
No one ever said the profits are quarantined, they must be distributed to eligible beneficiaries. The losses are quarantined in the trust.
Point 3, I agree, your investment is a loan to the trust, not a purchase of units or an income stream. There is a BIG difference. If you loan the trust money, you would expect to be paid interest. If the trust doesn't pay for the funds borrowed (ie – pay you interest) there is no commercial operation, and your interest deduction would be denied.
Your accountant is wrong. Here is a link to ATO Income Tax ruling 2385, called Expenses Incurred by Beneficiaries of Discretionary Trusts. The preamble states: "In a decision handed down by the Administrative Appeals Tribunal, the Tribunal held that a beneficiary of a discretionary trust was not entitled to deductions for expenses said to be incurred in relation to the trust income"
I agree with Dan.
The accountant is incorrect. Unless he is referring to a unit trust. IT 2385 says it all.
If your accountant needs any more confirmation he can look at the recent rulings concerning Hybrid Trusts were deductibility of interest was only possible subject to the wording of the deed concerning the discretion of the trustee.
Why not run an example by your accountant and see how he treats it.
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
hearing things like "ÿour accountant is wrong" when it comes to property like i see on so many occasions when reading up at this forum, i hope makes people take good care in finding an accountant that is like minded and well versed in dealing with property portfolios, i know its made me realise how important it is
Thank you for posting guys
I’m no accountant, but following both the Accountant and Dan’s thinking, you might be able to borrow money to lend to the trust, NOT with the intention of earning a distribution from the trust (because the trust’s income distribution is discretionary), but rather with the intention of earning a rate return a couple of points (or more) higher than you pay and/or it might pay had it borrowed directly elsewhere (the trust might not have been able to borrow elsewhere of its own accord, where you effectively become a 2nd, 3rd or 4th tier lender.)
Just thoughts, but I’m certainly going to ask my accountant about it when he gets back from Xmas.
exitpoll wrote:I'm no accountant, but following both the Accountant and Dan's thinking, you might be able to borrow money to lend to the trust, NOT with the intention of earning a distribution from the trust (because the trust's income distribution is discretionary), but rather with the intention of earning a rate return a couple of points (or more) higher than you pay and/or it might pay had it borrowed directly elsewhere (the trust might not have been able to borrow elsewhere of its own accord, where you effectively become a 2nd, 3rd or 4th tier lender.) Just thoughts, but I'm certainly going to ask my accountant about it when he gets back from Xmas.But – this will only move income from the trust to the person lending the money with the trust having a bigger loss.
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 Gavsam,
You need to remember that any structure you put in place is inline with your overall goal and outcome you want to achieve. Without giving you any personal advice on a public forum and not knowing your personal circumstances or the entire content of the information you were given. My advice to you would be to get a second opinion from a qualified CPA or CA accountant to ensure that the information that you were given is correct.
Regards Maurice
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