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Family Trusts

Discussion in 'General Investing Discussion' started by John Ben, 22nd Jul, 2008.

  1. John Ben

    John Ben New Member

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    I borrowed money in my name to put in the family trust. The family trust is using the money to buy investments. Can I claim the interest on the money borrowed in my name to offset my income(ie negatively geared borrowings) or can only the family trust claim the interest as negatively geared borrowings?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Generally, no - you can't claim interest costs for the money you borrowed to put in the family trust.

    You can have the trust reimburse you for your costs (thus the trust effectively gets to claim the expense), but that doesn't help you with negative gearing.

    If you really need negative gearing, you need to look into structures like Hybrid Discretionary trusts (take care - not all HDTs are created equal, and some are being questioned by the ATO).
     
  3. DotnetKris

    DotnetKris Member

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    I imagine you would be able to claim the interest deductions if you used a plan old unit trust.

    As always its best to ask questions before borrowing the money and purchasing the investment :)

    Cheers,
    Kris
     
  4. Sacko

    Sacko Well-Known Member

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    Would there be a benefit to borrowing in your own name to buy a very long term growth portfolio / fund and then logding this as security for a margin loan within the trust to buy an income fund (at a low gearing of 50%).
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yup, but there are other issues which make unit trusts not as suitable for many purposes. Pros and cons either way.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I would think it would depend on his reason for using a trust ... if asset protection is the key driver, then your suggestion is not really going to be ideal I'd think.
     
  7. John Ben

    John Ben New Member

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    Thanks for all your responses, very much appreciated, it gives me something to get my mind around:)
     
  8. Nigel Ward

    Nigel Ward Team InvestEd

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    Just to add to the good comments made above... an understanding of the basic principles of our (admittedly fiendishly complex) income tax laws is important as an investor I think. So too is a basic understanding of the nature and operation of any legal structures like your "family trust".

    With respect to tax, the first principle is that there's an allowable deduction for you in relation to interest costs (not principal repayments) on amounts you borrow to buy invesments with the expectation that they will produce an income. For example rent, dividends/trust distributions.

    With that basic principle in mind let's look at what you've done. First though let's consider the nature of a family trust.

    Typically what people call a "family" trust is structured as a discretionary trust. Assuming that's the case for you, there is no "investment" or piece of it that you buy in contributing money to the trustee of your family trust. Rather, as a beneficiary you'll have a right to be considered by the trustee to receive none, some or all of the net income of the trust and any assets of the trust in the case of the trust coming to an end (again, more complex than that but it'll do for now).

    So you have either gifted or loaned the borrowed money to your trustee. If the former then definitely you have not borrowed to buy an income producing asset. If the latter then it may be that some or none of the interest is deductible unless you charge a higher interest margin than you're paying...But of course if you were to do that then one of the tax benefits of borrowing to invest, namely negative gearing, would not be available. (Negative gearing being when expenses exceed income from investments so that the excess deductions which are not offset by the investment income are available to shelter some of the income from your job or other sources.

    Clear as mud? :confused::D

    Hope that helps.
    Cheers
    N.
     
  9. DotnetKris

    DotnetKris Member

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    I think thats a good explanation Nigel.

    In essence it comes down to whether you are are taking the loan to receive a guaranteed right to income and capital gain from the investment.

    Investing through a fixed trust will ensure the interest is deductable as you have a fixed entitlement to the income and capital from the trust. This would apply to a unit or hybrid unit trust.

    On the flipside if you have a guranteed right to income and capital gain, then this is viewed as an asset, and would therefore be at risk if you are sued for whatever reason.

    Cheers,
    Kris