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Lending to Trust

Discussion in 'Accounting, Tax & Legal' started by Swan, 27th Feb, 2009.

  1. Swan

    Swan Member

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    Hi all,

    Is it possible to lend money to a trust interest free, then get that trust to invest in a term deposit payign interest and stream that income to other family members?

    If so, how would this be different if I borrow money from a bank at say 6%, onlend to the trust at say 1% thereby creating a "negative gearing situation" in my personal name?

    Or does the loan in both instances need to be on "commercial terms"?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    There's nothing wrong with this. Just make sure there is a documentation showing that the money is a loan and not a gift. Check with your accountant if in doubt.

    This you would have difficulty with (assuming it is a discretionary trust). I'm no accountant, so I can't tell you the exact tax law that will get you into trouble, I can only tell you what my own accountant told me to do.

    If you borrow money in your personal name and lend that to your trust, the best you can do is to have the trust reimburse you for your expenses (ie the cost of interest) - in other words, there are no negative gearing benefits to be had.

    However, you may be able to do something more with a unit trust, or a hybrid trust structure (not my area of expertise).
     
  3. Swan

    Swan Member

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    Thanks Sim.

    I did speak to an accountant, and he said that I could borrow money from bank at say 6% and then onlend it to the trust at 1%. Because the money is used for income producing asset (i.e. receiving interest income), I could claim the negative gearing of the differential.

    To me though, that just didnt sound right.

    I can see how one could lend it interest free or at commercial rates but i cant see how one can manipulate the interest rate differential to gain a tax advantage.
     
  4. Young Gun

    Young Gun Guest

    So let's get this straight, your accountant has recommended you borrow @ 6% say on $100K, lend it to your trust @ 1% to create a negative gearing situation.

    so doing the maths it costs you 6% x $100,000 = -$6,000 for the loan.

    you can claim a (max) tax deduction of $5,000 x 45% = $2,250

    and potentially distribute the 1% income tax free to low income beneficary = $1,000.

    so -$6,000 + $2,250 + $1,000 = -$2,750 thats negative alright......

    I'm sure there must be more to it than this
     
  5. Swan

    Swan Member

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    My accountant is fired!

    You cant do it, just found out that there is a case called Ure's case that doesnt allow this arrangement. It restricts the deduction to 1%, so in effect there is no negative gearing possible.

    I thought it didnt sound right when he told me.
     
  6. AsxBroker

    AsxBroker Well-Known Member

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    I think the phrase Part IV A comes to mind...

    Cheers,

    Dan

    PS Speak to your registered Accountant before doing anything.
     
  7. try anything once

    try anything once Well-Known Member

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    I think it is possible to, but via a different route;

    1. You gift money to the trust. (assuming you already have some money to invest!!)
    2. Trust loans money to you at RBA rate for unsecured loan
    3. you invest the money and claim the interest as a deduction for tax
    4. Tust distributes its interest income to low tax rate beneficiaries
     
  8. Rob G.

    Rob G. Well-Known Member

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    But where did the money come from in the first place ?

    Cheers,

    Rob