Loan agreement between trust & individual

[Rob G.]

By commercial arrangement, do you mean a proper loan agreement drawn up by a solicitor?

AND the rates are commercially realistic.

e.g. Take out a loan at 5% secured against a residential property and on-lend to a discretionary trust unsecured at 5% is NOT commercial.

e.g. on-lend at a 'commercial rate', but interest may be deferred indefinitely non-compounding is NOT commercial.

Why would you be entitled to a full tax deduction for your original loan in this case ?

It suggests partly another, perhaps private, purpose.

Cheers,

Rob

 

[Terry_w]

e.g. Take out a loan at 5% secured against a residential property and on-lend to a discretionary trust unsecured at 5% is NOT commercial.

Great point!

 

[JIT]

AND the rates are commercially realistic.

e.g. Take out a loan at 5% secured against a residential property and on-lend to a discretionary trust unsecured at 5% is NOT commercial.
Rob

What is the alternative to this then?

 

[JIT]

What is the alternative to this then?

Does the trust have to guarantee the loan as a guarantor?
Or do you create a mortgage document?

 

[Rob G.]

The lender under a commercial agreement seeks to protect their position and the rate is priced according to the risk.

Guarantees and security reduce risk, that is why commercial rates for these terms are lower.

Cheers,

Rob

 

[JIT]

The lender under a commercial agreement seeks to protect their position and the rate is priced according to the risk.

Guarantees and security reduce risk, that is why commercial rates for these terms are lower.

Cheers,

Rob

Thanks Rob, how about a guarantee only without putting the security up as well?
If the security is used as well (eg. shares if the trust buys shares), then proceeds from any sales may need to go to repaying the loan first I guess?

 

[Rob G.]

Thanks Rob, how about a guarantee only without putting the security up as well?
If the security is used as well (eg. shares if the trust buys shares), then proceeds from any sales may need to go to repaying the loan first I guess?

It all depends on the facts of each case.

You always get specific advice about whether any arrangement will stand up.

Informal non-commercial arrangements between related parties deserve a review with your legal and tax advisers before acting.

Cheers,

Rob

 

[JIT]

It all depends on the facts of each case.

You always get specific advice about whether any arrangement will stand up.

Informal non-commercial arrangements between related parties deserve a review with your legal and tax advisers before acting.

Cheers,

Rob

Thanks Rob.

 

[Player]

This is a great thread. Some very valuable insights have been given.

On the notion of "commercial realism" can a beneficiary of a DFT lend (cash) money to the trust, as say a beneficiary loan, and not charge interest to the trust for this loan (for a period of time) until resolved otherwise by the beneficiary lender and the trustee?
The personal beneficiary lender is also the appointor.

One drawback I see is possible muddying of the waters with ATO as tax minimisation being the intent if future income is distributed to a beneficiary in a lower tax bracket. The asset held in the trust won't be yielding income for a while, hence wishing to not charge it interest.

Any thoughts.

 

[Terry_w]

This is a great thread. Some very valuable insights have been given.

On the notion of "commercial realism" can a beneficiary of a DFT lend (cash) money to the trust, as say a beneficiary loan, and not charge interest to the trust for this loan (for a period of time) until resolved otherwise by the beneficiary lender and the trustee?
The personal beneficiary lender is also the appointor.

One drawback I see is possible muddying of the waters with ATO as tax minimisation being the intent if future income is distributed to a beneficiary in a lower tax bracket. The asset held in the trust won't be yielding income for a while, hence wishing to not charge it interest.

Any thoughts.

Just think of the beneficiary and the trust as 2 unrelated people.
Would you lend me money on terms such as the interest being determined by you at some future date? Would I accept those terms?

 

[Rob G.]

On the notion of "commercial realism" can a beneficiary of a DFT lend (cash) money to the trust, as say a beneficiary loan, and not charge interest to the trust for this loan (for a period of time) until resolved otherwise by the beneficiary lender and the trustee?
The personal beneficiary lender is also the appointor.

No issue with a beneficiary on-lending money to the trust as such.

However, the discretionary beneficiary would not be able deduct their own interest expense on the expectation of future discretionary entitlement to trust income.

The connection is too remote.

Cheers,

Rob

 

[JIT]

On the notion of "commercial realism" can a beneficiary of a DFT lend (cash) money to the trust, as say a beneficiary loan, and not charge interest to the trust for this loan (for a period of time) until resolved otherwise by the beneficiary lender and the trustee?
Any thoughts.

Can't you just do a ''capital payment'' from the beneficiary to the trust?

So here you are not charging any interest to the trust and the trust can return this amount back to the beneficiary at a later date (with no tax implications)... ?

 

[Terry_w]

Can't you just do a ''capital payment'' from the beneficiary to the trust?

So here you are not charging any interest to the trust and the trust can return this amount back to the beneficiary at a later date (with no tax implications)... ?

You would carefully have to look at the trust deed and see if and when capital could be distributed to beneficiaries - and which beneficiaries. Does the trustee have this power, and is permission needed from someone else such as appointor and/or controller.

If this is possible you then have to consider how it could pan out. The beneficiary would be only one of many. Could he control the trustee and pass the other hurdles with appointor permission etc and could he cause the trustee distribute without breaching any fiduciary duties that the trustee has. etc.

 

[coastymike]

Taxation Ruling IT 2385 clarifies that in circumstances where expenses are incurred by beneficiaries of discretionary trusts those expenses incurred are not deductible where there is not a sufficient nexus between the expenditure incurred and the receipt of income.

Rather the beneficiary has a mere expectancy of receiving income from the trust as the taxpayer is not presently entitled to the income of the trust when the expenditure is incurred.

 

[redwing]

Yes I agree. My dog made that website for me. Just wanted something basic.

See my law firm website: www.finlaw.com.au

Reading and looking at this site I just had to go back and check the first site, then noticed your signature also

 

[Player]

Thanks for your input, Terry, Rob and Coasty.

There is no interest cost to the beneficiary making the loan as it would be ca$h (not offset/LOC funds) lent to the DFT, however the commercial integrity of the exercise may come undone as Terry has posed with his questions.

I will seek further legal and accounting advice (both my main providers are away on holidays at present) however see a gift to the trust as an easier/cleaner method.

The loan was preferred in the event cash-out refinancing of the asset was ever done in the future with a bank, so some of the cash loaned to the trust by the beneficiary could return to personal hands. In that event I guess charging an interest rate on commercial terms would be needed even moreso for the new prospective lender to view the transaction as being of a financial/investment nature.

Thank again guys.

This is a very insightful thread for all those with trusts. It's actually made me reflect some more on our own situations and chosen strategies moving forward. Most important also is to read your trust deed. No mater how fluffy and all-encompassing they may have been upon creation, it pays everyone with DFT's and other trusts to ensure they play by the rules.

 

[coastymike]

Main providers on holidays at this time of year !!! Gee i can only dream of such a thing

my personal opinion is that if you are injecting cash into the trust it would be much better as a gift for asset protection purposes. If you arent claiming interest on a loan the other side cant see why a loan would be beneficial.

 

[Player]

Main providers on holidays at this time of year !!! Gee i can only dream of such a thing

You should get to the coast more Mike

my personal opinion is that if you are injecting cash into the trust it would be much better as a gift for asset protection purposes. If you arent claiming interest on a loan the other side cant see why a loan would be beneficial.

I am inclined to agree the more I think of it. That's why this thread has made me question more and reflect on modus operandi moving forward.

These days I am finding it easier to seek personal investment funding outside of a trust for those assets in my name (with debt providing some form of asset protection) than for commercial deals inside of a trust especially with short settlement times that I am encountering here in Qld. The last two recent assets I've purchased have been at auction........right place....... right time.............right price.

As I accumulate more birthdays also I've probably reached a limit that I'm comfortable with as far as investment debt in my personal name. Buying in a trust with cash is something our situation allows and with discretion to pass on income to the lowest tax earner avoids need for trapping any short/medium term gearing losses in the trust and having to fund with after tax dollars from my pocket. The cash is also afforded a better level of protection being put to work within the trust.

Thanks for your posts.

 

[Terry_w]

my personal opinion is that if you are injecting cash into the trust it would be much better as a gift for asset protection purposes. If you arent claiming interest on a loan the other side cant see why a loan would be beneficial.

Yes I would tend to agree. The sooner you gift the stronger the asset protection.

 

[JIT]

You would carefully have to look at the trust deed and see if and when capital could be distributed to beneficiaries - and which beneficiaries. Does the trustee have this power, and is permission needed from someone else such as appointor and/or controller.

If this is possible you then have to consider how it could pan out. The beneficiary would be only one of many. Could he control the trustee and pass the other hurdles with appointor permission etc and could he cause the trustee distribute without breaching any fiduciary duties that the trustee has. etc.

Thanks Terry, so what is the difference between a capital payment to a trust and a gift to a trust... ?