Interest on a Loan to a Trust

Does anyone know if it is it possible for a trust to stop charging interest on a loan where it has previously has been (ie for the first yr of creation it paid interest to the lender but from now on i dont want it to charge interest anymore?)

Has anyone completed it with one of there trusts? Im just trying to think about what would be the documentation that i would need to show that i have stop charging interest.

Thanks Guys
 
You mean the trust has lent money and now doesn't want to charge interest?
Not sure on the answer, but things to consider:
- Trustee has a fiduciary duty to act in the best interest of the trust
- It is a commercial transaction? (ato could know back previous years interest claims???)


If the other way around, the trust has borrowed money, then I think the answer is easier. The trust could just repay the loan and the person gift the money to it. On second thoughts, that may not be a good idea. May be better to have the money owed and a new agreement with nil interest entered into.
Watch out for asset protection issues as the loan is 'property' of the person lending it.
 
If the other way around, the trust has borrowed money, then I think the answer is easier. The trust could just repay the loan and the person gift the money to it. On second thoughts, that may not be a good idea. May be better to have the money owed and a new agreement with nil interest entered into.
Watch out for asset protection issues as the loan is 'property' of the person lending it.

Trust has the loan from a related party who which is currently charging interest. the related party has borrowed the money from a bank and is effectively the middle man (ie currently recieves interest and pays interest to the bank). What i effectively want to do is "restucture" the loan and make it non interest bearing for the trust, (ie the trust does not pay any interest and the related party still pays interest to the bank). This allows any profit made by the trust to be distributed to minors rather than being eaten up by interest costs.

Not necissarly worried about asset protection as he will still have the loan to the bank (and therefore having net assets of zero)
 
Hi

In that case the person borrowing from the bank won't be able to claim the interest he is paying as it would not be commercial for him to borrow at 5% and lend at 0%. So I don't think it would work.

But I am not an accountant.
 
Hi

In that case the person borrowing from the bank won't be able to claim the interest he is paying as it would not be commercial for him to borrow at 5% and lend at 0%. So I don't think it would work.

But I am not an accountant.

yep, agreed.... there would be no commercial reason for the person to lend the money so therefore no deduction for interest costs...

it more comes down to is allowed to change a loan agreement without paying back the money and then re lending it (as its investments are illiquid)
 
Terry is on the right track.

From a commercial point of view, interest was borrowed from the bank originally and the money was on-lent to the trust as part of a commercial transaction. The ATO would prefer this remained. The more 'commercial' the transaction - the more favourable in the eyes of the tax man.

If the trust is then getting the benefit of the interest deduction, why would you want to stop this? The distributions to minors are normally just book entries in most cases, to reduce your tax burden. By not showing a distribution in your case, you may also reduce the compliance burden on the trust. Though I'm sure you could clear this up further.

Cheers.
 
If the trust is then getting the benefit of the interest deduction, why would you want to stop this? The distributions to minors are normally just book entries in most cases, to reduce your tax burden. By not showing a distribution in your case, you may also reduce the compliance burden on the trust. Though I'm sure you could clear this up further.

Cheers.

Coz in the event interest deduction pushing the trust into a loss position, franking credits are stuck in the trust and are lost....
 
Coz in the event interest deduction pushing the trust into a loss position, franking credits are stuck in the trust and are lost....

You only need $1 of net income to distribute provided your books show a tracing to dividend income.

Cheers,

Rob
 
You only need $1 of net income to distribute provided your books show a tracing to dividend income.

Cheers,

Rob

Unfortunatelly if i apply commercial interest rates during the year i end up with a loss of around $500 in the trust (meaning i lose out on the ~$500 of franking credits earnt during the year)....

you live and learn i guess
 
Top