Trust loaning to income earner?

We have just established a family/discretionary trust which will have cash to invest without needing to borrow.

Key drivers/objectives are: 1)finding a secure, stable, reasonable return investment for the trust to invest its money 2)Myself as the high income earner a source of debt with which to invest (negative gearing).

If the trust were to lend some money to me on the following terms:

• Unsecured loan
• interest payable monthly, if interest payment not made it is added to the outstanding loan balance (capitalised)

Given the unsecured nature of the loan, I would think an arms length interest rate would be around 11%?

The interest payable by me on the loan would be distributed to beneficiaries as taxable income (low tax rates)

I could claim a deduction on the interest payments to the trust.

downside of this is any capital gains would be stuck with me and hence higher CGT rate, but if I hang on to the assets until I leave paid work this is not an issue.

Any problems or issues anyone can see with this? If the interest rates are reasonable arms length rates does this eliminate an concerns of artifical arrangements (Note - we have a Corp Trustee which my wife and I are directors.)

 

If you have a corporate trustee you will need to be careful of using it as a bucket company (beneficiary) with respect to Div7A and debit loans to other beneficiaries (you).

Generally get the loan paperwork done, with P&I payments over 7 years and the above is not so troublesome.

I've taken broad brush strokes here so you need to speak with your accountant to get the full details.

 

This has got thinking whether one could use any cash balances in a trust as private bank.

E.g. Loan your self $10,000 over 7 years @ 11% interest to renovate your kitchen

Any thoughts....

 

Guys, i think it was the coles myer case many years ago that involved loans between non arms length parties.

I cant see div 7a applying providing you do not distribute to the trustee coy.
Rather than lend the money at 11%, I would lend the money at the RBA unsecured personal loan rate and link it to that rate or something similar. Payments and interest should be made and charged on the same terms as any other loan. providing the money is all used for investing the interest paid will be tax deductible.

Nickm

 

thanks Nick - where do I find what is the current RBA unsecured loan rate?

 

try
RBA: Alphabetical Index of Statistics - I

+ i have attached the spreadsheet from that site

 

thanks Nick