Hi Everyone,
The amount of information on this forum is unbelievable – keep u the good work guys.
Could someone please just clarify this for me:
I have a family trust with a company (non- trading) as trustee for it. Now I've given the trust money to buy some shares over the last 12 months.
Can the money which I've given to the trust to buy shares be an interest free loan from me to the trust? Can you lend money to a trust interest free? I've been told that you can give interest free loans to a family trust as I don't fall under the Div 7 act?
Your comments would be much appreciated
Thanks
Carlito
Why not? You could lend to anyone on any terms. (can you lend me $100 interest free?).
But, why would you want to?
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 Terry,
I was hoping that you would respond – thanks!
So Terry your saying that I should charge the trust interest – but at the same rate which I'm paying so it cancels each other out?
If the money I've given the trust wasn't borrowed then would you still have the trust pay interest back to you? This will then become income to me and the trust will take up the expense?
Thanks
Carlo
Hi Carlo
If you are borrowing money to give to the trust then things are different. You will be charged interest and would want to claim this. The only way to do so would be to charge your trust the same or more interest. Other wise you couldn't clam the interest.
If it was just cash you had, then I would just gift it. If you lend the money it is always yours. If you later went bankrupt it would be repayable back to your creditors. (even if gifted it can be clawed back in certain circumstances, but would be much safer). If gifted and the trust pays you interest then you are just getting a higher taxable income with the trust decreasing its income. You generally want it the other way around to make things more tax flexible.
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 Terry,
If I can charge any interest rate then what's the benchmark rate mean?
When does this apply? Is it only when lending money from company to another company? bit confused.
In regards to claiming the interest, if the trust makes a profit and get distributed to the beneficiaries lets say my wife and I which then gets added to our gross income – can i then claim the interest on the money I borrowed against my income? is it possible?
Carlo
If you are paying interest to the bank i would charge the trust the same amount. I don't think Division 7A would apply as you are not borowing money from your trust but lending to it. You should talk to an accountant.
You can only claim the interest if you are investing in something. A beneficiary could not claim interest on money "invested" in a trust. But you could claim money onlent to the trust if it is a commercial arrangement – ie charging the trust same or more than what you are paying.
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 Terry,
So if Im getting charged interest then I should charge the trust the same amount back but If I'm not getting charged interest due to have the cash then the trust shouldn't either? do you agree?
My aim is to buy property through the trust, so let's say I had the 20% which I lend to the trust and the 80% the trust borrows under the trust name:
1. Do the interest payments from the 80% loan from the trust need to be deducted from the trust bank account or can it come out of my normal trading account each month? I know that the rental payments must go into the trust account and from there you can transfer it out.
2. If the trust loan (80% of the purchase price) was for let's say 100,000 and I made a payment towards it of 50,000 to reduce the loan to 50,000. Does this mean that what the trust already owed previously has now gone up an extra 50,000 due to reducing the loan for it?
Loan to Trust 10,000 previous
Loan to Trust 60,000 nowTrust property loan down to 50,000 on the books.
You wouldn't charge interest to the trust on the 50,000 which helped reduce the loan?
Sorry about all the questions Terry just getting a better understanding before going ahead.
Thanks
Carlito
I think you should probably charge the trust interest if you are onlending money.
If you are gifting money to the trust then there is no interest on a gift.
If you had cash you could still lend the money to the trust interest free, but a gift is probably better.1. The trust should pay its own loans. If it hasn't got enough cash to do so it could borrow from you, or you could gift. Don't forget you are not the trust and the trust is not you. so you shouldn't be paying from personal to trust etc as this would look like there is not trust in existance.
2. If you pay the loan down by $50,000 then this is really just refinance one loan (the bank) with another (you). If you gift the trust $50k and it pays the loan down then the trust assets would have increased by $50k. Whether you charge interest or an interest free loan or a gift is up to you and your situation.
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
Carlito,
Just think of the trust as a separate person and see if you come up with the same results.
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 Terry,
Thanks for your advice, you've made it much more clear now.
Can I ask you what the difference is between lending the money to the trust and gifting the money to it? Like you said you don't have to charge interest on a gift but is that all?
I guess you can still lend the money to the trust – just make it a interest free loan.
Carlito
A gift is not returnable.
A loan is.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
Ok so it's not returnable but a loan is,
1. The trust should pay its own loans. If it hasn't got enough cash to do so it could borrow from you, or you could gift. Don't forget you are not the trust and the trust is not you. so you shouldn't be paying from personal to trust etc as this would look like there is not trust in existance.
Like you have mentioned above, I guess you would have to to always transfer funds across to the trust on a montly bases. In many cases the interest repayments are higher then the rental coming in so you would have to make sure the difference is covered each month.
Carlito
Thanks Terry for everything
Until next time
Take care
Carlito
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