Hi All, first of all – this forum rules!! been reading it for a while and finally have a question that I can’t find an answer to
can anyone offer an opinion on this …
I have a family discretionary trust which currently owes me $8,000 from an interest free loan I previously made to the trust for start up capital so it could begin buying shares and eventually invest in property.
So, here is the situation – last financial year the trust received about $5,000 income (after expenses) from a small property services business (shareholder only, not personal services income) and now that the trust is receiving income other than a loan from me to get things started, I want to use $2,000 of that to repay some of that loan it owes me.
Scenario 1 – Let’s say the trust repays $2000 to me personally, would that be an expense to the trust thereby reducing the trust taxable income to $3000? Would that $2000 payment to me be considered a distribution and therefore taxable income in my hands or simply a repayment of an interest free loan and therefore not taxable ?
Eventually, the trust would be able to repay the loan to me with the income from the business and make distributions direct. My plan would be to leave the distribution capital in the trust and either create an ‘unpaid present entitlement’ (UPE) account or simply gift the money back to the trust for working capital. I could then either gift it to beneficiaries over time as needed, or reduce UPE account. Obviously, I would need to declare the original distributions each year in my tax return.
Scenario 2 – What if I change the $8000 loan to a gift thereby removing the trust’s liability to me and changing it into ‘trust capital’ (seed money). In this scenario, would the money paid out to myself as a beneficiary, be a taxable distribution up to the limit of whatever the trust taxable income for that year was? Could distributions on top of that be a gift (the trust deed allows for gifts to beneficiaries)?
Any thoughts would be a great help
Thanks
Hi,
Trusts can be pretty complex so it would be best to get your accountant to help out. I can say though that if the trust repays $2000 to you as a part loan repayment, this is not taxable income for you. The trust can not claim the $2000 as a tax deduction, in much the same way as you can not claim the principle component of a bank loan as a tax deduction. You can only claim interest repayments as tax deductions, not principle repayments.
I do not quite follow what you mean by Secenario 2 sorry, I am not a tax expert and it is late on a Friday (and my colleague just handed me a beer so I have switched off!!)
Cheers,
LukeAgain, check with your accountant as they are the tax experts! Trusts do not pay tax but all profits need to be distributed each year to the Trust’s beneficiaries and then they are liable for income tax on the amounts received. Put simply, any money given to the beneficiaries by the Trust is added to your income and then taxable at the applicable rate.
Of course any loan repayments are not taxable. We’ve had Trusts since 2004.Mick
Just think of the trust as a person.
A person can gift to another person without any tax implications.
Capital of a trust can be distributed as a gift too. The receipt of the gift wouldn't be income. But as Luke said the trust cannot claim a deduction for the gift (assuming no charities etc).It is probably not a good idea to make interest free loans to a discretionary trust. There is no tax advantage over gifting and adverse asset protection reasons.
If the trust had $5,000 income and gifted or loaned $2,000 to you it would still have $5,000 in taxable income. If this isn't distributed to a beneficiary the trustee would pay tax on the top marginal rate.
If you forgive the loan and the $8,000 becomes a gift the same would apply.
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 everyone for the great thoughts and advice. I really appreciate your time and efforts.
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