Discretionary Trust questions

1. Yes you can lend to your trust. The trust can pay you back out of the profit, but this would not reduce the income of the trust, just like you paying $1000 off your ANZ loan would not reduce your income by $1000.

There is no need to charge your trust interest, but if you are borrowing from a lender and then lending to your trust your trust should probably pay you the same interest as you are being charged so it cancels out. Otherwise you would be left with paying interest to your bank and be unable to claim it.

2. Yes loan could be in anyone’s name if the bank will accept it. But the individual couldn’t claim a deduction for ‘investing’ into a discretionary trust.

If the trust was a unit trust the individual could borrow to buy the units. Because the units give a fixed entitlement to income the unit holder could claim the interest against their personal tax returns. This is not the case with a discretionary trust as there is no fixed entitlement. So if you borrow and invest in the trust there is no guarantee you will ever get a return because the trustee has discretion on who to distribute to.

The trust doesn't have to distribute all of its property, just its income (or if it doesn't the trustee is taxed). The trust will be holding a house, for example, and this will be growing in value. Eventually this could be sold or the loan will revert to PI and will gradually be paid off as rents rise.

Your example
– Rent $33,000
– Interest $28,000
– Depreciation & other non-cash deductions: $4,000

The taxable income of the trust would be $33,000 – $32,000 = $1,000
But the cashflow would be $33,000 – 28,000 = $7,000 this is because you can claim depreciation but not actually pay anything for it (its build into the purchase price).
This $7,000 would be capital of the trust and could be used to reduce the loan or held onto.

Not really sure what you mean about the offset account.
eg. if you had a $100,000 loan on your PPOR and $20,000 in the offset account. You would be paying interest on $80,000 and this would not be deductible.

if you were to take this $20,000 out for any reason the interest would be charged on $100,000 and you would still get no deductions. This would be the case even if you had lent the $20,000 to the trust. At 7% you would end up paying $1400 extra interest pa and not be able to claim it.

Had you set up a separate loan of $20,000 and then on lent this to the trust then the trust would end up being able to claim the interest and reduce its taxable income by $1,400. It would then be in a position to distribute this tax effectively.

If you borrow money at 7% and on lend it at 1% you would not be a very good business man as you would be losing money. This would be a non commercial transaction and the ATO would probably disallow it.

hi Tim

I am not an accountant, just a lawyer (sydney) with an interest in trusts, so I may be wrong, especially on the tax side of things.

A trust could acquire capital would be gifting to it, and if there is capital growth of the trust assets.

But I see what you mean.
eg. $500,000 property. with a $500,000 loan. Property increases to $1,000,000 and the trust sells it, paying back $500,000 loan. It is left with a $500,000 capital gain which would be distributed.

With your offset, the money in that is cash. You can do with it what you please. Go and bet it all on a camel race if you want and the extra interest incurred on your loan should be deductible as it is not borrowings. It is just cash temporarily parked in the offset.

There is no requirement that you must lend money to someone at market rates unless you want to claim deductions. So in this case you could lend it to your trust interest free. This would assist the trust make more profit and thereby mean your tax position is enhanced.

Good thinking