Gifting money into family trust

Hi, thank you for reading my long post and questions.

We set up a discretionary family trust a few years ago to purchase an IP apartment, for asset protection. We have "gifted" on 4 occasions some money to the trust offset account to help reduce the loss in the trust as we can not negatively gear a trust property. I think this year it will turn over to profit but my understanding is this profit will be offset against previous years' losses.

We have now purchased a second property which we intend to buy in the name of the trustee for this trust. We intend to live in this property as our PPOR.

My parents who are classified as non-residents for tax purposes (they currently live overseas), have offered to help pay for a large portion of this property purchase. I believe they intend to take out a loan overseas using their overseas property as security to do this.

We also intend to pay for the initial deposit from our personal account as "gifts" from us to the family trust.

I would be grateful if anyone would comment on these questions:

1. Are my parents allowed to gift a lump sum to the family trust and how does this affect their tax status?

2. What is the best way for them to gift this money from overseas? To transfer it to their personal accounts in Australia first then onto the trust account, or directly from the overseas account to the trust account? As a lump sum or separate amounts?

3. Are we (based in Australia) allowed to gift a lump sum for the deposit?

4. Will the family trust have to pay tax on these gifts, because the money will need to be in the trust account prior to settlement date?

5. Is there a "upper limit" of gift amount before the ATO will have issues?

6. How will they (and us too) prove these are gifts (not a loan) to the trust account, i.e. what documentation is considered adequate by the ATO? This is important because they are taking out a loan overseas, but do not want us to repay them. They believe it will help the family trust since the interest they pay overseas is lower than Australia.

7. As we will be living in this property owned by the trust, will we be liable to pay land tax? Will my parents be allowed to live in this property?

Thank you for your comments.
 
1. Read the deed

2. Every time money hits an account asset protection is reduced

3. Read the deed

4. Tax is only payable on income, but read the deed carefully and make sure the giftor is not treated as a notional settlor

5. No

6. Don?t worry about proving to the ATO, worry about trustees in bankruptcy, relatives at death. You should have deeds of gift drawn up. Otherwise there is no demonstration that it is a gift and not a loan.

7. Yes, and loss of CGT exemption. Read the deed and see if a beneficiary may live in the property.

Your parents should also consider whether gifting is a good idea.
? The gift won?t fall into their estate upon their death.
? No possibility of setting up a discretionary testamentary trust in their wills, which could benefit you more.
? Consider the laws in their home country. Consider asset protection risks of having one trust with large sums of capital.
? Interest on their loan won?t be deductible

Your ?gift?s are also at risk so you should fix this up asap.
 
We have now purchased a second property which we intend to buy in the name of the trustee for this trust. We intend to live in this property as our PPOR.

You may have FIRB issues with this structure if the value of gifts could have paid for 15% or more of the new property. Easily detected. Penalty is severe and imposed on Trustee Directors. You would want legal advice on how to ensure the gift is documented so its not argued it is a loan or an investment by a foreign person.

Loss of the Main residence exemption and land tax issues may occur with the PPOR. Reasons for doing this other than a foreigner buying Australian property ?
 
Thank you very much Terry and Paul for your comments and things to consider.
This is what I have learned so far and hopefully is correct so others in my situation might find helpful background info:

1. I have sat down and read the trust deed again. The Excluded beneficiary does not have a notional settlor clause. It only includes the settlor (our accountant), present/future trustees (except the first trustee which is the company (us being directors) and any persons breaching rule of perpetuities.

2. The deed doesn't have any clauses in relation to receiving gifts. Is that the norm or should I get that amended? The accountant had set up the trust for us and looks like the deed was from lawyers based in NSW. We live in Victoria.

The deed does allow for beneficiaries to borrow from the trust, with or without interest - doesn't this contradict the requirements that the trust needs to lend for commercial gain?

3. Re: CGT exemption, sorry I didn't mention we already have a property in our own names which we claimed as PPR initially but is now an IP. We intend to use the 6 year rule to maintain the CGT exemption. Therefore this new property will not qualify for a CGT exemption anyway in our personal names.

I have read that the capital gains from a trust property owned >12 months can be distributed and there will be a 50% CGT reduction to the beneficiaries, which in the future I intend to offset against my personal capital losses from stocks.

4. Re: land tax issues, if this VIC property is owned by the trust, I have read that the trustee of a discretionary trust can nominate a PPR beneficiary and that means the PPR land will be assessed on a single holding basis at general land tax rates without the surcharge that applies in a trust.

Effectively this means the difference with buying the property in the trust vs in our names, if we live in it as PPR, is that we are paying extra land tax at general rates minus the surcharge if the property is purchased in the trust as opposed to buying in personal names. Bc we already own a property in our name.

The trust deed has a clause that allows beneficiaries to live in trust property.

5. Re: FIRB issues, my parents are Australian citizens but have been living overseas, hence their "non-resident" status for taxation purposes. I thought as Australian citizens they do not fall under the foreign investor category even if they live overseas?

6. Regarding rectifying our money gifts ASAP (I assume for asset protection in case we are sued etc), do you mean by way of deeds of gift? Even if there are formal deeds of gift drawn up each time, is there a general limit on the frequency of "gifting" which will be perceived as "income" to the trust? Or perhaps, for example, if the amount of gift is the same each time?

Thank you again.
 
Beneficiary On lending to a family trust

Re: Tax deductibility if my parents are going to help: one other proposal is

1. for my parents to borrow money from overseas using their overseas home as security

2. they onlend to the family trust with a formal loan document, so the family trust can purchase the new property

This way, their loan interest becomes tax deductible. However how does one determine at what interest rate they should on lending for it to be commercially reasonable/at market?

Let's say their interest rate from the overseas loan is 2.5%. The interest rate we will probably get through a local bank is around 4.8%.

Does that mean that parents have to also charge 4.8% on par with the local Australian market, or can she charge the trust at 3.5% which is above the market rate for loans and for term deposits in the overseas country and parents make a profit of 1%. Ie which country do you use as a point of reference for setting commercially viable rates?

On paper, a trustee could argue it is in the trust's interest to be borrowing from parents who are charging lower interest rates.

If the trustee does pay my parents the interest for the loan, is it considered a quarantined loss that can be offset against other trust income even if the interest paid is for a PPR residence?
 
Thank you very much Terry and Paul for your comments and things to consider.
This is what I have learned so far and hopefully is correct so others in my situation might find helpful background info:

1. I have sat down and read the trust deed again. The Excluded beneficiary does not have a notional settlor clause. It only includes the settlor (our accountant), present/future trustees (except the first trustee which is the company (us being directors) and any persons breaching rule of perpetuities.

2. The deed doesn't have any clauses in relation to receiving gifts. Is that the norm or should I get that amended? The accountant had set up the trust for us and looks like the deed was from lawyers based in NSW. We live in Victoria.

The deed does allow for beneficiaries to borrow from the trust, with or without interest - doesn't this contradict the requirements that the trust needs to lend for commercial gain?

3. Re: CGT exemption, sorry I didn't mention we already have a property in our own names which we claimed as PPR initially but is now an IP. We intend to use the 6 year rule to maintain the CGT exemption. Therefore this new property will not qualify for a CGT exemption anyway in our personal names.

I have read that the capital gains from a trust property owned >12 months can be distributed and there will be a 50% CGT reduction to the beneficiaries, which in the future I intend to offset against my personal capital losses from stocks.

4. Re: land tax issues, if this VIC property is owned by the trust, I have read that the trustee of a discretionary trust can nominate a PPR beneficiary and that means the PPR land will be assessed on a single holding basis at general land tax rates without the surcharge that applies in a trust.

Effectively this means the difference with buying the property in the trust vs in our names, if we live in it as PPR, is that we are paying extra land tax at general rates minus the surcharge if the property is purchased in the trust as opposed to buying in personal names. Bc we already own a property in our name.

The trust deed has a clause that allows beneficiaries to live in trust property.

5. Re: FIRB issues, my parents are Australian citizens but have been living overseas, hence their "non-resident" status for taxation purposes. I thought as Australian citizens they do not fall under the foreign investor category even if they live overseas?

6. Regarding rectifying our money gifts ASAP (I assume for asset protection in case we are sued etc), do you mean by way of deeds of gift? Even if there are formal deeds of gift drawn up each time, is there a general limit on the frequency of "gifting" which will be perceived as "income" to the trust? Or perhaps, for example, if the amount of gift is the same each time?

Thank you again.

1. Not sure what you mean about excluded beneficiaries here
2. What happens to subsequent settlements after the initial settlement

3. There is no requirement that a trust needs to lend for commercial gain. Trustee has duties regarding this, but if the deed expressly permits the trustee these duties may not apply

4. In Vic that may be possible

5. Look at the FOREIGN ACQUISITIONS AND TAKEOVERS ACT 1975 definition of ?foreign person?.

There can be issues with Aussie citizens not ordinarily residing here where they are involved with or related to trusts and companies

6. You need to make sure the gifts are effective. There are a lot of legal cases on this. No limits on gifting and it shouldn?t be classed as income unless the is some obligation attached to the gift.
 
Re: Tax deductibility if my parents are going to help: one other proposal is

1. for my parents to borrow money from overseas using their overseas home as security

2. they onlend to the family trust with a formal loan document, so the family trust can purchase the new property

This way, their loan interest becomes tax deductible. However how does one determine at what interest rate they should on lending for it to be commercially reasonable/at market?

Let's say their interest rate from the overseas loan is 2.5%. The interest rate we will probably get through a local bank is around 4.8%.

Does that mean that parents have to also charge 4.8% on par with the local Australian market, or can she charge the trust at 3.5% which is above the market rate for loans and for term deposits in the overseas country and parents make a profit of 1%. Ie which country do you use as a point of reference for setting commercially viable rates?

On paper, a trustee could argue it is in the trust's interest to be borrowing from parents who are charging lower interest rates.

If the trustee does pay my parents the interest for the loan, is it considered a quarantined loss that can be offset against other trust income even if the interest paid is for a PPR residence?

Many issues here such as
commercial rates - would it be commercial for such a low rate if there is no security?

Withholding tax on interest paid to non residents.
 
Thank you again for your comments.

1. Not sure what you mean about excluded beneficiaries here
2. What happens to subsequent settlements after the initial settlement

The trust deed only lists the Excluded beneficiaries as the Settlor, future trustees and persons in breach of rule of perpetuity. You mentioned I need to be beware that a beneficiary giftor is not treated a notional settlor (which could mean they are excluded from further benefit).

I can't see that being described in the deed, there is no mention that the giftor is treated as a notional settlor.

There also does not appear to be a notional settlor clause in the deed stating a giftor/notional settlor will be excluded as a beneficiary.

To be on the safe side I will need to ask if the deed can be varied (we are the appointors) to be extra clear, i.e. to amend under "Excluded beneficiaries" the Settlor to Initial Settlor as set out in Schedule 1 ( (this seems to be the easiest way)


3. There is no requirement that a trust needs to lend for commercial gain. Trustee has duties regarding this, but if the deed expressly permits the trustee these duties may not apply
Thank you

4. In Vic that may be possible

5. Look at the FOREIGN ACQUISITIONS AND TAKEOVERS ACT 1975 definition of ?foreign person?. There can be issues with Aussie citizens not ordinarily residing here where they are involved with or related to trusts and companies

Thank you very much for pointing this out. My parents certainly fall into the foreign persons category even if not involved/related to trusts

6. You need to make sure the gifts are effective. There are a lot of legal cases on this. No limits on gifting and it shouldn?t be classed as income unless the is some obligation attached to the gift.

When you say I need to ensure "gifts are effective", does this mean I need to demonstrate the purpose of the gifts need to benefit the Trust beneficiaries? Or effective as in demonstrating that gifting has occurred by a Deed of Gift?

Thank you also for the comments re: tax deductibility.
 
If the person who gifted the money were to become bankrupt a trustee in bankruptcy would try to claw that money back as it can't be demonstrated what the giftor's intentions were. A statutory declaration or a deed would demonstrate their intentions and could be used in court as evidence if need be.

If you want to amend the deed you have to work out who has the power and exercise this power strictly in conformity with the deed. e.g. failure to deliver notice to the trustee could make the amendment ineffective.
 
In regards to the ATO and tax, your parents can gift as much as they want and it should be tax free.

However if a large sum of money is transferred from overseas to yourself or the trust, the ATO will assume it is income and you will have to prove that it is not income. I have seen the ATO just issue an amended assessments on gifts of money from overseas and let the taxpayer prove its not income.

In short you'll have to make sure your parents are non residents for tax purposes if the ATO looks at it, that the money does belong to your parents and isn't your money that you have hidden overseas. The could assume it is your money that you have hidden overseas and you have not declared income on the earnings.
 
Re: Tax deductibility if my parents are going to help: one other proposal is

1. for my parents to borrow money from overseas using their overseas home as security

2. they onlend to the family trust with a formal loan document, so the family trust can purchase the new property

This way, their loan interest becomes tax deductible. However how does one determine at what interest rate they should on lending for it to be commercially reasonable/at market?

Let's say their interest rate from the overseas loan is 2.5%. The interest rate we will probably get through a local bank is around 4.8%.

Does that mean that parents have to also charge 4.8% on par with the local Australian market, or can she charge the trust at 3.5% which is above the market rate for loans and for term deposits in the overseas country and parents make a profit of 1%. Ie which country do you use as a point of reference for setting commercially viable rates?

On paper, a trustee could argue it is in the trust's interest to be borrowing from parents who are charging lower interest rates.

If the trustee does pay my parents the interest for the loan, is it considered a quarantined loss that can be offset against other trust income even if the interest paid is for a PPR residence?

This raises a withholding tax problem. Withholding tax must be paid or the loan deductibility can be at risk. This would have impacts on the overseas tax since the ATO will report to their govt tax agency (perhaps). Of course the loan must be calculated and paid and records retained that show this is occurring on a arms length basis or the loan may be seen as a sham.

Then there is the issue of repatriating the net interest (after withholding tax) back oseas to pay down the foreign loan. There is a currency risk perhaps ? There would be a cashflow timing issue.

Then the loan raises some issues with currency conversion. What is the base currency for the loan ? How is interest calculated and paid ? Borrowing in foreign currency needs to consider effect on debt if exchange rates change. This will harm either borrower OR lender.

I still don't understand how a trust is involved yet a PPOR is mentioned? If the parents $ is used to buy a PPOR then interest is non-deductible. If the trust uses the $ to buy a trust property then its a trust deduction.
 
Thank you everyone for posting such valuable points. I have met with my accountant and to be honest he wasn't as informative as the responses you have provided. But maybe I'm expecting too much.

In a nutshell, he suggested

1. If planning to live in new home as PPR then buy in personal name, even if we have another PPR already. Asset protection is lost if not in the trust, but you don't have to pay land tax and will have CGT exemption on 1 property and 50% on the other if held >12months. He said trust properties attract 100% CGT (this part I'm not sure about as I read otherwise)

In the long term if the PPR becomes an IP in say 10-15 years time then the benefits of personal ownership is negative gearing, while in the trust interest deductions offset the profits.
At the moment our other IP in the family trust should be making a profit next year. Buying the new home in a trust now, and "renting to the beneficiaries i.e. us" would still mean the interest exceed rental income hence the loss will exceed our other IP profit - thus losing out on the distributable profit.

2. He didn't go into much about gifting except to say there is no gift tax in Australia. Also that Australian citizens living overseas are not subject to FIRB restrictions if they want to buy a house in Australia.

He wasn't sure about Deeds of Gift or the notional settlor clause/amending the trust deed, but said he will forward my questions to the lawyer if I requested him to. We are the appointors in the trust deed so should be able to amend the deed. He told me however that it was sufficient to document as gifts the sums of money to the trust.

3. we have decided it's too complicated trying to using overseas loans from my parents to finance the new home. It would be great if mum account can be used as offset against our personal loan. I read in the another post that it possibly can be done, carefully drawn up by lawyers, but the banks will prob say no anyway.

Tomorrow I meet with the bank re: loan approval. Hopefully the outcome will be good. Realised I'm probably not getting the best of loan deals right now, after reading more threads :(

Thank you again
 
It sounds like you were expecting legal advice from an accountant. He was right to refer your questions to a lawyer, but he got the tax question he was qualified to answer wrong. Trusts do get the 50% CGT discount if the beneficiary of the gain is an individual.

Asset protection is legal advice - not sure what you mean by "Asset protection is lost if not in the trust" but it implies that only a trust ownership of property provides asset protection. This is wrong. And a trust owned property could provide little to no asset protection at all - especially from other family members and even on bankruptcy, depending on the terms and type of trust. What are you seeking protection against?
 
It sounds like you were expecting legal advice from an accountant. He was right to refer your questions to a lawyer, but he got the tax question he was qualified to answer wrong. Trusts do get the 50% CGT discount if the beneficiary of the gain is an individual.

Asset protection is legal advice - not sure what you mean by "Asset protection is lost if not in the trust" but it implies that only a trust ownership of property provides asset protection. This is wrong. And a trust owned property could provide little to no asset protection at all - especially from other family members and even on bankruptcy, depending on the terms and type of trust. What are you seeking protection against?

SOME trusts access the 50% CGT exemption. If its a conventional family discretionary trust with no overseas beneficiaries and changes to the trust during the period then it is usually available.

I have seen a complex issue where a trust makes a capital gain and couldn't distribute it as the trust also had revenue losses... (or even cfwd cap losses). The clauses in the deed also need review to determine if the trust can allocate specific income / stream..If the deed didn't allow for streaming or identification of precise income to distribute in its character so the discount was effectively lost as CGT gains are first offset by losses before offsetting revenue losses. That's rare but it does occur.

It would be worth discussing with your accountant - Either he has it all wrong or he hasn't explained a issue affecting the discount that he understands.
 
Thank you for the comments.

Re: asset protection in the trust it was in relation to my occupation, if I was to be sued then assets in my personal name would be exposed.

Yes, I wasn't expecting the accountant to answer the legal questions re: settlors but he had organised the lawyer to draw up the deeds then passed it onto me. The lawyers are based in NSW with a GPO address on the deed. So I thought I should ask him to direct my questions to them. I was also concerned when I asked about the "gifts" we had made to the trust, that he just said he had planned to write it down as a beneficiary loan.

Re: CGT discount, he didn't go into details of why we wouldn't qualify for a property held in the family trust >12 months. No other revenue in the trust for now except for rental income from another IP.

On another note: re: FIRB and foreign persons definition, I seeked clarification from the FIRB re: whether my parents who are Australian citizens living overseas long term would be eligible to purchase an Australian residential property without approval. (I know this is different to my original considerations about them assisting with the purchase in the family trust). The response I got was they would not require FIRB approval.

Cheers, and thank you once again. I have been successful with negotiating with my bank for a loan at competitive rates so am very happy about that.
 
Re: asset protection in the trust it was in relation to my occupation

In that case you are wanting protection from potential bankruptcy. Just be aware that it is not as simple as setting up a trust. Strength depends on the structure of the trust and how transactions are structured and managed.
 
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