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Family Trust & Taxation Issues

Discussion in 'Accounting, Tax & Legal' started by DaveL, 4th Feb, 2007.

  1. DaveL

    DaveL Member

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    Hi Kind Friends,
    I have recently settled on a property which I have set up to be neutral to positive cash flow within a Family Trust with a Corporate Trustee. I am currently updating my accounting package (Quicken), creating new accounts and acquiting the squillians I seem to have spend and trying to get on top of all the vast transactions which have occured. Anyway, some questions to the forum on issues I have encouted and would love your feedback.

    1. Are Family Trust costs (and Company set up for Trustee) deductible against the property purchased, or deductible in general? Is there any component of family trust cost deductible for whatever reason? In other words, how may I be able to legitimately deduct these costs?
    2. The Trust has a loan equal to 80% of the value of the property. The other 20% + costs has been funded essentially by refinancing our own home and opening a new loan sub-account with also an offset account against it. Since the purpose of the loan was to fund the property purchase, albeit in a new structure, how are the costs and interest treated? That is the 20% + costs component. Is it deductible for myself or for the Trust?
    3. What are the best options for providing the 20% + costs to the trust and documenting in the Minutes of the Trust? For example should I loan these monies to the trust or gift? I am thinking that a loan is the way to go because in time, I can pay myself back via return on capital. As I suggest, the Trust will be reasonable positive cashflow on its own funds (ie. the 80% component).

    Hopefully I have expressed myself well, but please feel free to ask more questions because I suspect many others could greatly benefit from the exchange of ideas. My greatest appreciation.

    DaveL
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    This is not a complete answer - I'll have to let Nick do that, but I can tell you how I structured things ... we too used equity from a property in our own names to fund the deposit and costs for an IP purchased in our trust.

    We structured it as a loan from ourselves to the trust (meaning we can draw that money back in the future without paying tax on it). We had the trust reimburse us for all costs incurred (including interest from our equity loan). There was no tax deduction for us personally.
     
  3. DaveL

    DaveL Member

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    thanks Sim, this in essence are what I also believe to be the case. Thanks for your reply.

    cheers
    DaveL
     
  4. TryHard

    TryHard Well-Known Member

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    One thing I vaguely recall from somewhere is that the ATO looks for evidence of a properly executed and commercially 'proper' loan agreement to cover the funds involved. I also half remember that for negatively geared property the purchase of units in the Trust was recommended, and for positively geared property the loan arrangement you described is more common. But I might have only got half the story ... Nick ? :)
     
  5. NickM

    NickM Co-founder Staff Member

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    Hi Dave
    will try to answer your q's

    1. Setup cost of entities used for investing eg trusts and smsf's are not deductible. Trading companies can claim set up costs over 5 yrs. If your invoice includes ABN, TFN, meetings etc then those costs should be isolated and claimed.

    2. You are the middle man (or woman). You have borrowed the $ then on lent to the trust. the trust will pay you the interest then you pay to the bank.
    Tax Deduction is for the trust.

    3. If you gift the 20% to the trust, the interest will not be tax deductible to anyone. Better leave as a loan.

    Hope this helps
    Nickm
     
  6. DaveL

    DaveL Member

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    Thanks Nick and others for feedback. I did conclude the 20% + costs should be a loan to the the trust. Would I need to document a formal loan agreement? Because the property is just purchased, my figures are only estimates and even though the Canberra Rental Market is very tight, it may be I still experience vacancy which of course will cause pertabations in my estimates. So what I am getting at is that I would prefer to loan the 20% to the trust, but not be to regimented with the pay back time frame etc. Can this be at the discretion of the Trustee?

    I have a Corporate Trustee (with ABN) for my Family Trust. So, can I deduct the set up cost of the Corporate Trustee? Would a family Trust normally have a ABN? If it could and I did seek an ABN for the Trust, would that normally suggest I can deduct the Family Trust costs over the 5 years suggested?

    Many thanks
    DaveL
     
  7. NickM

    NickM Co-founder Staff Member

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    Dave
    No formal loan agreement is necessary, however it should be reflected separately in the balance sheet and not thrown into the mix of Beneficiary loans.
    You cannot claim the deduction for the trust just because it has an ABN.
    it needs to conduct a business. Buying 1 Ip is not conducting a business. Sorry
    Nick
     
  8. DaveL

    DaveL Member

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    Many thanks Nick. My goal is to do significantly more within the Trust. I'm looking at setting up share trading accounts and further down the track, trading options. I am writing a formal Business Plan for the trust and so I suspect this would satisfy any "Litmus Test".

    Appreciate your kind feedback and contribution.

    Dave