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Loans and Trusts

Discussion in 'Accounting, Tax & Legal' started by tik_nat, 10th May, 2010.

  1. tik_nat

    tik_nat New Member

    10th May, 2010
    Hi All,

    We've just set up 2 trusts (1 for my wifes new business and one to transfer our shares into....we're looking into transfering our property as well, but it doesn't look like it'll cost more than it saves). Our investment loan is a hybrid trust (Planning to use it as a discretionary trust but wanted to have options in the future). I have a few questions -

    1. I know that if I take out a loan personally to buy units in the hyrid trust, I can claim loan costs on tax (provided the terms of the units allow absolute entitlement to income or capital or both derived from assets bought with funds from the sale of my units). Now, if the TRUST takes out the loan to buys income producing assets, any losses are the trusts. But, if, i purchase units in this trust, and the terms of the units require me to pay the loan costs for the portion of the invest for which i'm entitled to income am i still able to claim any loss on tax?

    2. If I give a loan to a trust (via the trustee to buy a business / investments), and the trust ends up not being able to pay back the loan (eg failed business, investment losses etc.), how is that loan treated on my tax? Capital loss?

    I'm sure I'll have a few more as I go along. We're at the point where our finances will probably now require an accountant, but I doing things that I don't understand.

    Thanks in advance

  2. GregR

    GregR Well-Known Member

    13th Jul, 2009
    Berwick Vic
    The concept of going into structures which you do not clearly understand is one that is fraught with danger. It is better talking to a number of people first and getting different opinions and indeed options as there are normally a number of ways to skin a cat.

    That said, before you do too much else, go back to the people who recommended the structures and get them to detail in writing why they have done it and how you need to use it for best effect.

    Transferring existing assets into another legal entity will most likely result in a new stamp duty assessment. There would need to be solid reasons to incur this cost. The use of a trust is predominately for asset protection where there is a risk of being personally sued via your business dealings. There are other ways to achieve a similar result, reducing the value of your net assets in your own name is one common mechanism. Other reasons for use of a trust include flexible income distribution if the trust generates a profit.

    A hybrid trust is a difficult beast because most lenders do not like it and will not lend funds to it. Using it for a property vehicle may not be the wisest move if you get to the stage you cannot obtain further funds from lenders. The jury (ATO) is still out on whether you can claim negative geared losses using a hybrid trust, so be aware before you go too much further.

    As to your specific questions:
    1 - I don't know specifically but it would be likely if the expense is necessarily incurred to produce the income
    2 - generally a capital loss

    You may need to go and talk to another good accountant, presuming your first one set these structures up for you, to make sure these trusts will achieve what you want to achieve.
    Good luck
  3. MattR

    MattR Well-Known Member

    23rd May, 2007
    I pretty much agree with GregR's comments above. I'd add that I do get wary of Hybrid trusts and borrowings with respect to the deductibility of interest - the Trust Deed will define what Income is and how its to be distributed, so that will in turn help provide any rationale for deductibility of interest.
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    I agree about the caution with Hybrid Trusts ... not all of them are made equal and the ATO has been looking at HDT arrangements very closely and disallowing some deductions in some circumstances. Make sure the advisors you are talking to really know their stuff on HDTs and have a track record to show it.