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Which trust to use for investing in managed funds?

Discussion in 'Finance & Banking' started by johnnyb, 2nd Sep, 2005.

  1. johnnyb

    johnnyb Well-Known Member

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    Hi All,

    I am looking at setting up an LOC on our PPOR, with the aim to invest some of the money in a managed fund. Obviously I want to be able to claim the interest payments on the LOC as a tax deduction, and also be able to distribute the income from the fund in the most efficient way.

    We currently have two trusts:
    1. A discretionary trust which holds one IP and some units in a managed fund. Overall the trust is slightly CF+, which we distribute to my wife at the end of the year as she is currently not working.
    2. A HDT which holds one negatively geared IP. I have purchased all the units in the trust, and so am claiming the interest on the loan as a tax deduction (and receive all the income).

    Assuming the new investment in the managed funds using the LOC is CF+, which entity would be the best to hold the units? If I gift the money to the discretionary trust can I claim the interest as a tax deduction? Or should I purchase more units in our HDT and let it purchase the units in the managed fund.

    My idea has been that we would use the discretionary trust for CF+ investments, as we can distribute the profits to my wife, and the HDT for CF- investments, to enable me to claim the tax deductions. Does that make sense? If so, how can I use the discretionary trust to buy units in the managed funds and still claim the LOC interest as a tax deduction?

    Thanks.

    John.
     
  2. johnnyb

    johnnyb Well-Known Member

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    * bump *

    Anyone?
     
  3. eddievanhalen

    eddievanhalen Active Member

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    I'm no accountant John but my opinion is that the only way you'll be able claim the interest from the LOC on your PPOR (the relevant portion anyway) is to buy further units in the HDT. Borrowing money to gift to a DFT that may or may not distribute income to you is not good enough when it comes to claiming interest as a deduction.

    Cheers,

    Ed.
     
  4. pthm

    pthm Well-Known Member

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    Hi John

    I'll have a go at replying to your question (am not an accountant so don't take it as being correct).

    You said you want to set up an LOC on your PPOR, and draw down funds from LOC to invest in managed funds. You expect the returns from managed funds will be greater than the interest costs on LOC - giving you a net positive income. And, you want one of your trusts to own the managed funds and to be able to distribute the net income to your wife (who is not working).

    Are you going to set up the LOC in your name only or in joint names? (Is your PPOR in joint names?). If you expect the investment in the managed funds to give you a net positive income, then there are a number of ways to do this:

    1. Set up an LOC in your wife's name and she can draw down the money to invest in the managed funds. She claims the tax deduction on the LOC interest, but offsets it against the distributed income from the managed funds - resulting in a net income to her (and not you).

    However, if you want one of the trusts to own the managed funds, I am not sure what is the best way to structure this. Someone can answer this. However, this is what I think for HDT, from the LOC drawdown your wife purchases the income units in the HDT (like you did for the negatively geared IP) to enable the HDT to invest in the managed funds. If you keep separate records for the IP and the managed funds for the HDT, then maybe the trust can distribute the income from managed funds to your wife to enable her to offset it against the interest on the LOC. However, I may be wrong in that all income & expenses for the HDT are considered to be one pot. I get somewhat confused on this ... I would be interested in hearing other views on this.

    2. Set up an LOC in your name and you draw down the money and lend it to your wife on the same interest rate as the LOC (you are neutrally geared) and she then uses it to invest in the managed funds (she claims the interest payable to you as tax deduction against the distributed income from the managed funds). I don't think you can draw down the money from the LOC, purchase the units in the HDT, claim the LOC interest, and then have the trust distribute income to your wife and not you.

    Am not sure if you can borrow the money from LOC, gift it to the DT so it can invest in managed funds and have it distribute income to your wife. Someone may care to comment on this.

    3. If you set up the LOC in joint names and either you or your wife can draw down the money for separate investments in your own names and each will be able to claim the interest deductions based on his/her portion. This was a question that I asked - and the answer was that the interest deductibily would be on the use and purpose of the funds rather than the source. Having a joint LOC gives you this flexibility without having 2 separate LOCs - my view, that is.

    Hope I have not confused you with the above - as I am thinking of doing the same thing myself on this and by answering this post helps me to clarify my thinking.
     
  5. Muz

    Muz Member

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  6. johnnyb

    johnnyb Well-Known Member

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    Hi All,

    Thanks for your thoughts.

    ed, what you've said is exactly what I've been thinking, hence my original post to see if I was missing something.

    pthm, you've outlined a few options that I wouldn't have even thought of. Excellent.

    Muz, the comment from Nick is very interesting - I'll have to follow that one up I think.

    John.
     
  7. TryHard

    TryHard Well-Known Member

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    Managed fund from HDT

    Hi Johnny

    I'm no expert, but unless I misunderstood the question, I think I already do what you've described. :)

    My very basic understanding is :

    1. Where negative gearing benefits are needed from the investment

    Buy special income units in your HDT. With the resulting cash the HDT will invest in the chosen managed fund. The income from the managed fund will come back into the HDT for distribution to unitholders. The person who bought the special income units in the HDT will be entitled to claim the interest deduction for borrowings used (in this case from the LOC) as the funds were for income earning purposes.

    I think the income from the managed fund is then usually apportioned back to that unitholder, as a result of their right to income from the units they hold in the HDT.

    2. Where Investment will be CF+

    I understand when you expect an investment to be CF+, it is more common to loan the money to the HDT and arrange for repayment of those funds by the HDT to the lender under the terms of a properly constructed loan contract with commercial (market-realistic) terms. The Trust then claims those repayments as a valid expense. Any remaining profit would then be distributed to the beneficiaries of the Trust.

    Hope that helps. NickM is the guru - he might pick any holes in my (well meaning but possibly incomplete) advice.

    Cheers
    Carl
     
  8. johnnyb

    johnnyb Well-Known Member

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    Hi Carl,

    Yes I think what you're doing is what I'm wanting to do.

    Where you say
    how did you go about setting up such a contract. Is the a job for a solicitor? Is there a standard form that can be used?

    John.
     
  9. TryHard

    TryHard Well-Known Member

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    Loan contract

    Hi John

    Sadly I have never yet got our Trust into any positive cashflow assets :), so have not yet had to use that option (I've only done the negative gearing scenario so far - sorry I explained it badly ...)

    However I have read that it's important the paper trail is solid and likely that the loan contract should be done by a properly qualified professional. I think mainly from the point of view it needs to stand up to scrutiny by the ATO etc.

    I did find some templates on a website a while back, which I now can't find, but I guess since then I have found its probably safest to spend a few hundred bucks with the professionals rather than rely on something cheap and not specifically written up for your needs. The risks of getting it wrong are pretty real.

    Based on my experience with HDT's to date I'd be asking NickM for a paid review of the whole scenario. He saved me major heartache, and really in these matters everything can look ok on the surface but be a nightmare in accounting and legal terms.

    Just my 1.5 cents worth ... ;-)
    Cheers
    Carl