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Lending To Invest

Discussion in 'Accounting, Tax & Legal' started by Strawbs, 15th Jan, 2017.

  1. Strawbs

    Strawbs Member

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    Hi, I am pretty bullish about the share market so I am going to lend some money to bulk up my portfolio, which is in a Family Trust, and have a question in relation to the “lending vehicle”. That is, I have a Ready Credit account with Citibank which a special interest that is actually better than the standard Margin Loan rate from CommSec so I am looking to use that. To ensure it is clear I am using this money in the name of the Trust:
    • Upon settling the trade: Transfer the money from the Ready Credit Account into the Trusts settling account and recognising this quantum as a loan payable (ie not a Trustee Loan)
    • When making payments against the loan: Transfer the payment into the Trust’s bank account and then in turn, transfer from there into Ready Credit (along with acknowledging the interest and principle payment in the Trust).

    Does anyone see any reason the above would not be seen as a Trust loan by the ATO?

    Thanks,



    Brian.
     
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  2. twisted strategies

    twisted strategies Well-Known Member

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    sorry , i am an old-timer , you have me cofused here

    ' lend some money ' does that mean you have say $100K in term deposit ??

    i have a BIG DISQUIET over anything providing a drawn-down facility (similar to a margin loan ) calling itself anything other than flexible debt .

    if Citibank blur that definition what else do they blur .????

    i do not have a similar style loan .

    and think the market is within 10% of it's (cyclic ) top .

    which is still nice for an aggressive trader .

    had my circumstances not changed recently i would be looking to stock-pick defensive style stocks and now maybe even BEAR ETF , which i had previously avoided )

    please seek extra advice of theproduct youare intending to use (and ATO advice on any benefits/detriments )

    what Gina Rinehart and Kerry Stokes can mould into an asset might differ greatly for you
     
    Last edited: 15th Jan, 2017
  3. Strawbs

    Strawbs Member

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    Thanks for the reply Twisted Strategies and apologies for not being clearer.

    I am certainly not Gina or Kerry level but still have a few "irons in the fire" which I am looking to add to.

    I am keen to take out an investment loan to buy more securities. One strategy is to take out a Margin Loan directly in the name of my Family Trust which whilst pretty straightforward, requires a mountain of paperwork and will come at a higher interest rate then I can get directly from Citibank via my Ready Credit Account (think a large overdraft at a very good interest rate).

    So noting the money I "borrow to invest" via the Ready Credit Account is not directly under the name of the Trust, I was wondering how I go about making it clear that I as the Trust Trustee, are indeed borrowing under the umbrella of the Trust. It occurred to me that if the transactions all occur via the Trust bank account (ie settlement of the shares I buy and repayments to the loan), then that may be enough.

    Thoughts/suggestions very much welcomed.
     
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  4. Hodor

    Hodor Well-Known Member

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  5. Strawbs

    Strawbs Member

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    Thanks Hodor, that is a very useful article.

    Based on such, I think I am on safe ground. That is, I can very clearly show that whilst the vehicle may be an instrument which is strictly in my name, I am acting as the "Trustee" of the Trust given the shares I am purchasing are for investments in the Trust (also noting the Ready Credit account will have zero personal activity). This would appear to be very similar to me using my personal credit card to pay, for example, my account for the Trust's tax return but claiming such as a Trust dedication - namely, it is clear in that example I am acting as the "Trustee" and not as myself.
     
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  6. Hodor

    Hodor Well-Known Member

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    I am no expert, just remember reading that link.

    I would pay for professional advice if lending to a trust.
     
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  7. Strawbs

    Strawbs Member

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    Oh, the other thing I should have clarified is the interest I am referring to is not be charged by me, it is the interest that is being charged by Citibank for the (what is) investment loan.
     
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  8. Hodor

    Hodor Well-Known Member

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    Like I say I am no expert or even an amateur in this area.

    The above sounds worrying from what I understand of such things. If you are borrowing money in your name through your facility then you want interest to be deductible. The only way I understand this can happen is if the money is used to invest in something that you expect to receive a return on personally.

    Which would mean you would have to have an agreement with the trust to receive interest on then money you lend to it, and charge a higher rate than you are paying (why would you invest if the return is less).

    I could be misunderstanding what you wrote also.

    Once again, this is something I know almost nothing about. Hopefully someone with a better idea can clarify.
     
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  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It is completely reasonable for you to borrow money in your own personal name, lend that money to your trust to invest and have the trust reimburse you for your expenses (ie interest costs and bank fees).

    So long as you aren't trying to do something like claim those costs as a personal expense in your personal tax returns - the money received is an expense reimbursement rather than income.

    Of course, you could go one step further and set up a loan agreement with the trust paying you back some other (higher) amount of interest for the use of the money - but the simplest approach is to just have the trust reimburse you.

    We did exactly this in the past - we had a separate $25K LOC facility on our home loan which we loaned to our family trust and the family trust reimbursed us the interest costs.

    Provided that there is a clear paper trail, there should be no questions - but always best to check with your accountant as to what documentation may be required for any loans between entities. It may be as simple as a minute made by the trustee.

    Assuming you have a trust bank account? If so - just make sure all money transfers into and out of the trust go via that account.

    When buying shares - transfer from personal LOC to trust bank account and then from there to your share trading facility to purchase shares.

    When Paying down the loan - sell shares, withdraw proceeds into trust bank account when settled and then transfer to personal LOC from there.

    Never transfer funds directly from personal LOC to share account - there may be questions about exactly whose money it is, so strongly advise that you don't - transfer it via the trust's bank account first to ensure it's clear that it's the trust's money which is being invested by the trustee on behalf of the beneficiaries of the trust.

    There are two completely separate things happening here:

    1. you are lending money to the trust and the trust is reimbursing you for your costs
    2. the trust is investing in shares

    ... make sure you keep these two activities separate.
     
  10. austing

    austing Well-Known Member

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    Excellent post by Sim in keeping the process simple. I'm also not convinced that formal loan agreements are mandatory in simple situations as described by Sim above.

    In addition to minutes etc also helpful is if your accountant keeps a set of accounts showing who the loans are from. You really need to show somewhere that funds have been "loaned" not "gifted" to the trust.
     
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  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Absolutely.

    That was standard process for my own situation - I used Reckon Personal Plus (aka Quicken) to track my personal side of things so I can see how much the trust owes us and I used Saasu (and Quickbooks in the past) to track the trust's loans - including loans from the directors of the trustee company and (interest) expense reimbursements. The two sets of books (personal + trust) need to balance on both sides to make sure you're tracking everything correctly.

    One other question for @Strawbs - do you have a company trustee or are you a personal trustee of the trust? That may well complicate things a bit if personal trustee - makes it a bit more difficult to show that the funds are being invested by the trust rather than by you personally.
     
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  12. Terryw

    Terryw Well-Known Member

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    You don't mention a written loan agreement between yourself and the trustee on commercial terms.

    If there was none then the ATO may not allow the trustee to claim a deduction - nor you.
     
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  13. Terryw

    Terryw Well-Known Member

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    Reading further I see you are the trustee. Don't forget a trust is not a separate legal person. It is the trustee that is the legal person and you cannot contract with yourself so you cannot have a loan agreement with yourself.

    You could borrow in your own name and then use the funds as trustee and have the trust claim the interest. For tax purposes there is a legal fiction that the trust is a separate 'entity' to the trustee - but not at law.

    Be careful of contaminating the borrowed funds though. Don't have any other money in the share trading account when you deposit.
     
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  14. Strawbs

    Strawbs Member

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    Hi All,

    Sorry for the slow reply and while I am sure the below is telling yourselves ‘how to suck eggs’, I thought I would outline the advice I got from my accountant to get your thoughts.

    BACKGROUND
    - I have a discretionary Trust that I am the personal Trustee of
    - The trust holds shares only (i.e. there are no invest properties or the like – as I side note I do own some property, but it is via FT’s, just my preference)
    - All Trust transactions occur via/through the Trust’s bank account
    - I have set up the Trust as the number of shares I own is reasonable and will grow over the coming period (mid/high six figures), and my kids will be in that 18-23-year-old bracket for when I want to start drawing down on the investments. That is, I am not looking to ‘hide’ money from creditors.
    - I have a PAYG job, and therefore the risk of me being personally sued is low, but I also accept, that is not zero.

    GIFTING
    - I have gifted the Trust a reasonable amount of money by drawing on my personal savings and using those funds (via the Trust’s bank account) to purchase various securities.
    - I have used a Gift Deed to record these transactions, which has a witness signature, and this will be reflected in the Minutes of the Trusts annual meeting.
    - As touched on above, this is not to hide money from creditors but only to use the spare funds I had available.
    - Accounting treatment is: Dr Cash, Cr Trust Funds. Then when purchasing the securities, this was reflected via Dr Securities at Cost, Cr Cash


    LOAN
    - In addition to the Gift and as per my earlier posts, I have also used a person LOC to lend funds to the Trust to purchase additional securities. The rationale being the increased dividends and interest deductions more than offset the interest costs. Of course that is not always guaranteed.
    - I have used a Trustee Minute to record these transactions, which has a witness signature, and this will be reflected in the Minutes of the Trusts annual meeting.
    - Accounting treatment is: Dr Cash, Cr Loan Payable; as funds transferred from my personal bank account to the Trusts account which is then immediately transferred to the LOC: Dr Loan Payable, Dr Interest Paid, Cr Beneficiary Loan Payable
    - Given an LOC may have personal transactions against it as well, I have created and keep a repayment schedule. This clearly shows daily interest costs, and loan payments which are reconciled against bank statements therefore clearly separate any personal activities (by the way there haven't been any personal transactions to date) from me acting ‘On behalf of the Trust’.



    The advice I have received is the above will create the necessary paper trail should I be audited to clearly show the difference between the Loan–Gifts and outline how interest claimed had been calculated and reconciled.


    Any advice/comments greatly welcomed.
    Cheers.
     
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  15. Terryw

    Terryw Well-Known Member

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    Hi Strawbs

    Sounds good, but just keep in mind you cannot contract with yourself. The deed of gift would be a deed poll with just 1 party - yourself stating that the money is being settled on trust and is nonrefundable etc. You are really settling more money on trust rather than gifting. Make sure your trust deed is worded in a way that you are not classed as 'the settlor' and are thereby excluded as a beneficiary.

    You cannot lend money to yourself either. But you can borrow in your capacity as trustee which sounds like what you have done.

    Did you get legal advice on the above set up?
     
  16. Strawbs

    Strawbs Member

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    Thanks Terry.

    I received advice the structure and approach are correct but are yet to get legal advice on the wording/layout of the deed poll.

    That is correct I am borrowing in my capacity as trustee given (as you say) I can't lend money to myself. The Trustee Minute makes it clear on the quantum being loaned, the interest rate is as per what is being charged by the bank, that I am acting "On Behalf of the Trust" and references the section of the trust deeds which allows me to loan money (again) On Behalf of the Trust.

    Cheers.
     
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  17. Terryw

    Terryw Well-Known Member

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    By a lawyer? Be careful of getting advice on this sort of thing from accountants as this is the legal arena.
     
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  18. Strawbs

    Strawbs Member

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    Very good point Terry and in the interests of full and complete disclosure (even a disclaimer) I should stress this is advice from my accountant. This is also why I have forwarded an email to your personal/work address to see advice from a lawyer given the implications (financial and otherwise) of getting this wrong.