Better for Company to Gift or Loan to Family Trust

[ktime]

Hello All,

Can an existing company Loan or Gift (doubt if it can) funds to a new Family Discretionary Trust?

The existing company has cash reserves and is looking to expand into "new" opportunities.

I understand that loaning to related parties is do-able, as long as it's done on a commercial basis and min. yearly repayments are made to the company (DIV7a)

The company does not trade with the public and is a legacy of a business venture past.

If you think this looks like a structure in reverse, it is - it's a hangover from the past looking to go in another direction.

If possible would like the movement of funds to remain at company / trust level and not at a personal eg: no loans to individuals (DIV7a) and then gifted on-wards to the trust.

Look forward to hearing form you all......

Peter

 

[alexlee]

Who owns the company? Can the company distribute dividends to the individuals, who can then gift to the trust?

 

[ktime]

company is owned by same family and yes they could distribute franked or unfranked dividends........could be cleaner and easier. Didn't twig to that.....many thanks for the headsup!

 

[Paul@PFI]

"Can" it. Sure. Might it be a sound structure ? No. A company cant gift...Not without some deemed div issues. And a CGT issue. I would avoid it.

Division 7A may treat a loan to a related party or an interposed entity as a dividend. Its also means that there remains an asset in the company....At the end of the day if the company "invests" in the trust then a payback might be expected. To company shareholders. So then the problem may be that the profit is ordinary company income with its tax problems, franking etc and loss of CGT concessions etc. Could there be a difference in parties between the interests in the company and the (likely broader) objects of the trust ?? Usually the answer is yes. So a liability risk may remain even if the trust were used to find those tax differences. It might not be too hard for an aggreived shareholder (like an ex wife) to argue fraud.

Perhaps winding-up the company might be a tax efficient way to release cash and allow funds to find a way to the trust for a new investment ?

Liquiditors distributions are often overlooked. And a liquidator doesnt always need to be appointed for a liquidation to occur. And sometimes a return of capital to shareholders can be CGT efficient too.

Once a legit path to the shareholders is found then individuals can gift away.

 

[ktime]

"Can" it. Sure. Might it be a sound structure ? No. A company cant gift...Not without some deemed div issues. And a CGT issue. I would avoid it.

Division 7A may treat a loan to a related party or an interposed entity as a dividend. Its also means that there remains an asset in the company....At the end of the day if the company "invests" in the trust then a payback might be expected. To company shareholders. So then the problem may be that the profit is ordinary company income with its tax problems, franking etc and loss of CGT concessions etc. Could there be a difference in parties between the interests in the company and the (likely broader) objects of the trust ?? Usually the answer is yes. So a liability risk may remain even if the trust were used to find those tax differences. It might not be too hard for an aggreived shareholder (like an ex wife) to argue fraud.

Perhaps winding-up the company might be a tax efficient way to release cash and allow funds to find a way to the trust for a new investment ?

Liquiditors distributions are often overlooked. And a liquidator doesnt always need to be appointed for a liquidation to occur. And sometimes a return of capital to shareholders can be CGT efficient too.

Once a legit path to the shareholders is found then individuals can gift away.

Many thanks Paul.

Why would loans between two parties be treated as a Dividend when the loan agreement is in place and on com. basis with repayments made?

 

[alexlee]

If the objective is so that the trust can have cheap or free money to invest so that the income can be distributed to lower income family members, then having to pay interest on the money isn't ideal.

It may make more sense to just liquidate the company and restart from scratch.

 

[Paul@PFI]

Why would loans between two parties be treated as a Dividend when the loan agreement is in place and on com. basis with repayments made?

Why would you lend $$ to the company at the benchmark rate which means paying divs to shareholders and tax etc ??? Isnt it a dormant Co.

I'm addressing the issue of the trust making $$$ not the company AND the trust making $$$ after paying benchmark %%. My strategy would focus on avoiding a potential deemded div cause someone didnt follow every step. I cant say I have ever seen a (happy and) compliant Div 7A loan !!!

 

[ktime]

If the objective is so that the trust can have cheap or free money to invest so that the income can be distributed to lower income family members, then having to pay interest on the money isn't ideal.

It may make more sense to just liquidate the company and restart from scratch.

Not so much cheap money because it would be done on com. basis to avoid Div7a problems. (definitely not free money).

It was only as a means to an end and the old company could then be used to cap.
tax at the corp. marginal rate.

Liquidation might be easier and needs more thought - many thanks.

 

[ktime]

Why would you lend $$ to the company at the benchmark rate which means paying divs to shareholders and tax etc ??? Isnt it a dormant Co.


I'm addressing the issue of the trust making $$$ not the company AND the trust making $$$ after paying benchmark %%. My strategy would focus on avoiding a potential deemded div cause someone didnt follow every step. I cant say I have ever seen a (happy and) compliant Div 7A loan !!!

Paul, I'll take your advice on DIV7a seriously. Are you saying that loans can not be setup, comply and be managed? I know the ATO looks closely at loans but if setup correctly, why can't they be an option?

Can't the trust loan from the company? And so be responsible for repayments etc etc....

Please go easy mate, I'm only asking as I thought company loans could be a useful tool in specific circumstances as long as they comply.

(But as the moderator said perhaps winding up is an option...)

 

[Terry_w]

Coming in a bit late, but a better question would be "should a company lend money to a trust". Many tax issues as Paul has mentioned

but other issues include
Estate Planning - what happens on the death of the person controlling the company or the shareholder. Could their estate miss out?
Death of person controlling the trust
Asset protection issues
Security issues - should the company take any security?
contractual issues

 

[ktime]

Paul, after re-reading your post, I want to thank you. The tax implications you mention and expectations are clear to me now, as are your comments re: Div7a loans

The company as it stands, exists to trade stocks etc. We're wanting to either move funds out or build a structure with it remaining in-place but for it's role to change and provide an "in-house" LOC only to other ventures. (this will need to be looked at closely)

Certainly will make going forward an interesting chapter in our expansion.

 

[ktime]

Coming in a bit late, but a better question would be "should a company lend money to a trust". Many tax issues as Paul has mentioned

but other issues include
Estate Planning - what happens on the death of the person controlling the company or the shareholder. Could their estate miss out?
Death of person controlling the trust
Asset protection issues
Security issues - should the company take any security?
contractual issues

Terry, you make a compelling points and I will contact you soon.

 

[Ace in the Hole]

Hello All,

Can an existing company Loan or Gift (doubt if it can) funds to a new Family Discretionary Trust?

The existing company has cash reserves and is looking to expand into "new" opportunities.

Hi Peter,

If I follow what you are saying, this is what we have done over the past few years. Use excess funds from our company (business profits) to lend to our trusts allowing our last 2 property developments to be pedominantly self funded.
There was no contracts or loan agreements made up, but it will all get calculated sooner or later and the loan period is only for a matter of years.

Our accountant is very switched on with business, companies, trusts and super, so I'm confident there will be no problem with what we've done.

 

[alexlee]

There was no contracts or loan agreements made up, but it will all get calculated sooner or later and the loan period is only for a matter of years.

Our accountant is very switched on with business, companies, trusts and super, so I'm confident there will be no problem with what we've done.

The first comment would seem to contradict the second. Was there interest paid by the trust to the company?

 

[Terry_w]

There was no contracts or loan agreements made up, but it will all get calculated sooner or later and the loan period is only for a matter of years.

.

This is crazy.

Loan agreements can be oral, but there are so many issues here. You may think the parties are all yourself, but they are not. A company is a separate legal person as is the trustee. If there is no written loan agreements there will be difficulty in enforcing the loan - what are the terms for example. What if you lose control of the trust, the company may have problems recovering the money. Is the director of the company acting reclessly by lending to a related party without an agreement. Is this even allowed in the constitution. What if you die or worse, become incapacitated. Do you have a power of attorney in place etc etc

 

[Ace in the Hole]

The first comment would seem to contradict the second. Was there interest paid by the trust to the company?

There will be interest paid as it's a commercial loan, how much is up to my accountant to calculate.

This is crazy.

Loan agreements can be oral, but there are so many issues here. You may think the parties are all yourself, but they are not. A company is a separate legal person as is the trustee. If there is no written loan agreements there will be difficulty in enforcing the loan - what are the terms for example. What if you lose control of the trust, the company may have problems recovering the money. Is the director of the company acting reclessly by lending to a related party without an agreement. Is this even allowed in the constitution. What if you die or worse, become incapacitated. Do you have a power of attorney in place etc etc

The terms are to pay back the principle with interest charged at commercial rates, it's an open ongoing loan/s, which will likely be paid back in the next month or so.
In what ways can we lose control of the trust? this is something I'm not aware of.
Is an oral agreement good enough?
If anything were to happen to me, can another beneficiary of the trust make a claim?
If this is illegal, I'll take immediate steps to get it sorted out.
If it's just a high risk situation, I'm fine with that.

Thanks

 

[alexlee]

There will be interest paid as it's a commercial loan, how much is up to my accountant to calculate.

Think of what you're saying. Would you take a loan from a bank and just leave it up to them to calculate how much you need to pay?

The terms are to pay back the principle with interest charged at commercial rates, it's an open ongoing loan/s, which will likely be paid back in the next month or so.

Where are these terms recorded? How do you prove the parties agreed to it?

In what ways can we lose control of the trust? this is something I'm not aware of.

Bankruptcy and death are common.

Is an oral agreement good enough?

If someone disputes it, how do you prove it?

If anything were to happen to me, can another beneficiary of the trust make a claim?

It's not your capacity as a beneficiary that's risky.

 

[Ace in the Hole]

Think of what you're saying. Would you take a loan from a bank and just leave it up to them to calculate how much you need to pay?
No.

Where are these terms recorded? How do you prove the parties agreed to it?
They are not recorded formally as far as I know, there maybe notes taken from my previous meetings with accountant.

Bankruptcy and death are common.
Yes, everybody dies sooner or later.

If someone disputes it, how do you prove it?
No proof as far as I know.
I don't know who would dispute it though.
Being the sole director of the company lending the funds and the sole director of the company to the trusts borrowing the funds, I don't see who else could make decisions in this case.

It's not your capacity as a beneficiary that's risky.
I don't know exactly what that means, but my wife and I are beneficiaries if it makes any difference.

Thanks Alex.
I'm trying to understand the issues here, is it's not something I've been made aware of before.
I have trusted my accountants advice so far based on his credentials.

 

[Terry_w]

There will be interest paid as it's a commercial loan, how much is up to my accountant to calculate.



The terms are to pay back the principle with interest charged at commercial rates, it's an open ongoing loan/s, which will likely be paid back in the next month or so.
In what ways can we lose control of the trust? this is something I'm not aware of.
Is an oral agreement good enough?
If anything were to happen to me, can another beneficiary of the trust make a claim?
If this is illegal, I'll take immediate steps to get it sorted out.
If it's just a high risk situation, I'm fine with that.

Thanks

It may not be illegal, but there are many potential issues.
Oral agreements are not good because there is no evidence other than your memory - which would be gone if you died or lost capacity.

Something bad is unlikely to happen, but imagine what could happen.

eg. You are hit in the head with a brick on your development site and lose capacity - a coma maybe. You are director so this office would be vacate on loss of capacity. If you had appointed an attorney before hand this person may now control the company. They may look through the accounts and not understand what is going on. They may end up asking the trust for the money back - litigation could result.

However, they could also be the same person that now controls the trust. You have to read the deed to see what happens on legal disability - such as who will be the next appointor. The office may be vacated = no one. If you were the trustee of the trust then this postion would be lost on capacity. It could be your uncle harry who applies to the supreme court to become trustee. He then argues with the company that the money was a gift and not a loan. The company disputes this. Statement of claims are issued, lawyers and barristers brieft.

you wake from your coma to find uncle harry has vested the trust and benefitted his children with all the capital. The company is in liquidation with a court judgment and the money lost...

Similar if you were to die.

Not to mention all the tax issues.

 

[Terry_w]

In what ways can we lose control of the trust? this is something I'm not aware of.

You may be the person who controls a trust, but this is only temporary.

There are several ways you could lose control.

The obvious ones are
1. bankruptcy. A bankrupt cannot be director or trustee
2. Incapacity. A person lacking legal capacity cannot manage their affairs or act as trustee or director
3. Death.
4. Appointor could remove you.
5. Beneficiary could apply to the courts to have the trustee replaced - note the Reinhart case recently.
6. shareholders of trustee company could vote director out.
7. Divorce/family law disputes


etc