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Trusts and Loans

Discussion in 'Accounting, Tax & Legal' started by DaveA, 9th Sep, 2007.

  1. DaveA

    DaveA Well-Known Member

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    Im just trying to think through some of the tax implications of this...

    If i set up a DT and lend $20k from a LOC, the net tax to me is 0, and the trust claims the deduction for the tax... However can the trust then buy shares, set up a margin loan withdraw 10k equity, is it possible for the trust to then say lend my wife 10k for a seperate loan which is then used for non deductible purposes?

    It would then be me 20k loan, nil effect me, trust gets deductions
    Her - 10k loan, nil effect to the trust and no deductions for her as its non assessible

    So basically, is a new loan from the trust going to contribute repayment of the original loan?

    I know people may think this is more difficult way and it should just be 2 10k loans, and 10k margin loan to by shares inside the trust, however if i can this way up itll be much clearer for a tax trail in future years as it allows me to withdraw upto the LVR limit (taking complete advantage of my lending capacity) and if i ever get a call, im only paying back non deductible loans and its a clear tax trail
     
  2. Rob G.

    Rob G. Well-Known Member

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    Is it worth it ?

    Setup costs being a capital expense, potential lenders charging to check the deed, Accountants charging more for checking related party dealings & due dilligence.

    Can't see any special advantage unless you also wanted the trust for future purposes such as holding valuable assets for risk or estate planning. There won't be much equity appearing from your 10k investment to warrant the cost unless you expect it to rocket up.

    If the loans are not on an arm's length commercial basis and everything is deemed a private arrangement by the ATO, then it is still neutral (no income & no deductions).

    EXCEPT in both cases you have the admin costs of the trust.

    Cheers,

    Rob
     
  3. DaveA

    DaveA Well-Known Member

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    the trust is being set up anyway so there is the admin cost there anyway.. risk is an issue as we are both graduate accountants and hence i want to get all my investing into a trust from word go...

    the only additional thing maybe related party dealings, total original injection to the loan is going to be about 80k i think

    i agree there are no special advantages i know except for keeping it clean for the future tax.

    The plan would be the original loan back from the trust will be for a house deposit, and then when equity increase, ill get a LOC pay the loan back for the money (hence now the margin loan is 0) and then the margin loan will be used to purchase additional shares.

    The only arms length that i can think of is does it constitue repaying of the original loan

    ** i agree with anyone who will say having a loan to the trust isnt great for asset protection, however this will only be loaned until one of us gets into a real issue with protection so i have thought of that**
     
  4. DaveA

    DaveA Well-Known Member

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    Just thought id expand this.

    I say it is worth it because currently we have ~50k which is being used for investing, but in an ineffective tax way.

    What we plan to do is using a product similar to the St George Portfolio loan, deposit that 50k into a main sub account, then withdraw via another sub account and lend to the trust. We will purchase ~50k of shares with this, we then would like to have a margin loan set up which would be mainly an emergancy money fund where we can cash draw down the margin loan, lend this money to us (not repaying the original loan amount) placed into a sub account, which then via other sub accounts it can be used as a mix of investing and personal (however the tax trail says its all private, the investing sub accounts would get the investing interest deductions) and upon part repayment of the loan from the trust to us, this will effect none of the tax deductabilty of what we used the money for (as it will be in other sub accounts)

    If this all doesnt fly, id lend the trust 25k and margin loan of 25k and invest. This option just doesnt give me the flexability of spilting the margin loan into private and investing as the opition does with the sub accounts. If they invented margin loans with sub accounts id prefer this option and be a very happy chappy...

    I know its a bit confusing, and hence why i explained it again. Im looking for absolut max flexibility and max borrowing capacity at this point of time as well as having the Sleep at night factor that i have a large emergency place i can withdraw funds from in the future.

    As you may tell i enjoyed my tax subjects at uni, and while i dont think this is beyond the line i will admit its "creative accounting"
     
  5. Rob G.

    Rob G. Well-Known Member

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    Sounds like you have conflicting requirements.

    For asset protection, it is good to have legal title with the Trustee so that equity growth is protected. It is also good for estate planning.

    A (commercial) loan by you to the Trustee is an asset of yourself as beneficiary and so is not protected from your creditors. But the equity growth is protected.

    However, you want to 'aggressively' borrow against the growing equity. If the trust does not have other assessable income then negative gearing is out of the question in the trust. Also, if you need to draw on all equity for personal reasons it sounds like you will need influence over the Trustee which may constitute an 'interest' in the trust and so might not be protected from creditors, along with possible CGT issues.

    Another possibility is negative gear investments in your own name for a while then gift capital to the trust when it gets risky, which is most likely when you cease to be an employee. The trust can always loan it back, but transferring assets has costs.

    Also, if an employee you can salary sacrifice by the higher earner both you & your spouse's costs and your employer can claim any GST credits that might be going (good if one of you stops working) - yeah I know not much GST on financial products but good for investment properties.

    Just some thoughts, but I would not fall in love with the loan arrangement until perhaps your goals are a little more defined.

    Cheers,

    Rob
     
  6. DaveA

    DaveA Well-Known Member

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    I agree, however if i have borrowed this money to loan to the trust there should be a asset for x but also a liability for x, leaving a nil position available for creditors, so until as you say one becomes an non employee im happy with this level of protection
    its only going to be a share trust which id imagine would be positive geared most of the time, so if it is negative one year aits fine to keep the loss in there
    Saying that i think this could be my downfall. Would it work say if a trust owns assets and i set up a margin loan in an individual name and use the trust assets as 3rd party security holders and borrowed against them externally to the trust? This would take it down a tad in the simplicty to execute. Thinking about it actually id prefer this than the original way

    i do like the salary sacrificing idea though, investment propertys are probably in about a 18 month time frame and will be held in a HDT (If they are still operational) so i do think this rules this option out (please correct me if im wrong). Im comfortable with myself and risk, being an employee in a big 4 theres limited risk but im more planning for future carrer moves, the other half is in a very small office with 3 people so i feel her risk is higher, hence why im a bit happy to go for overkill (in some peoples opinons) now

    admin costs and running costs of the trusts are luckily minimal for us, as there all 'fringe benefits' of the other half with very little monitory cost, so while this all might not be 'effective' for people who have to pay the large costs to run structures become effective to us
    Im always open for ideas on how things can be done better, its just good to pick someone else brain for a change