Loan agreement between trust & individual

A

ashley7070

Hi All,

I have borrowed 100k from the bank and plan to enter a loan agreement between myself and the trust where interest is paid at agreed rates which are normal and commercial.

Trust Magic states that the trust can claim the interest as tax deductible. Does anyone know whether I can personal claim the interest as tax deductible?
 
If it is a proper commercial arrangement, it would make sense you would report the income (interest received from the trust) and expense (interest paid to the bank).

The trust would report the interest paid to you as an expense.
 
ashley7070 said:
Hi All,

I have borrowed 100k from the bank and plan to enter a loan agreement between myself and the trust where interest is paid at agreed rates which are normal and commercial.

Trust Magic states that the trust can claim the interest as tax deductible. Does anyone know whether I can personal claim the interest as tax deductible?
Click to expand...

If it is a discretionary trust then you could not claim the interest in your tax return as there is not certainty of any benefit from the loan. You would be just a discretionary beneficiary.
 
Terry_w said:
If it is a discretionary trust then you could not claim the interest in your tax return as there is not certainty of any benefit from the loan. You would be just a discretionary beneficiary.
Click to expand...

If the loan is made on commercial terms then it should be deductible. No difference from the trust borrowing from a bank.
 
MRO said:
If the loan is made on commercial terms then it should be deductible. No difference from the trust borrowing from a bank.
Click to expand...

Not deductible to the person. Deductible to the trust. I think Ashley wants to lend money to the trust but claim the interest himself/herself.
 
In practice, wouldn't it be:

1) Trust gets the interest deduction
2) Individual claims the interest as income
3) Individual claims the bank interest as deduction

So the net benefit to the individual is zero?
 
alexlee said:
In practice, wouldn't it be:

1) Trust gets the interest deduction
2) Individual claims the interest as income
3) Individual claims the bank interest as deduction

So the net benefit to the individual is zero?
Click to expand...

Yes, that is a more concise explanation of my first post in this thread.

Net result is the trust gets the interest deduction and the bank borrowings are in the name of the individual.
 
If the net benefit to the individual is zero is it correct to say that the only benefit of drawing the loan agreement is so that the trust can claim the tax deductions?
 
ashley7070 said:
If the net benefit to the individual is zero is it correct to say that the only benefit of drawing the loan agreement is so that the trust can claim the tax deductions?
Click to expand...

Not the only benefit. You need to be able to get your money back. What if you lose control of the trust for example?
 
Terry_w said:
Not the only benefit. You need to be able to get your money back. What if you lose control of the trust for example?
Click to expand...

What if you are the joint appointer of the trust? Is that not sufficient to not lose control?

The main point is it possible to have a discretionary trust borrow funds from a beneficiary who borrows that money from bank and lend it to the trust and keep the ATO happy, by what Alexlee mentioned in his post?

What is the alternative, that beneficiary accepts the interest costs (being non-deductible) but also pays tax on the interest income he receives from the trust?

Cheers,
Oracle.
 
btw Terry, you have some awesome qualifications, but seriously the worst website I have ever seen! (PS: checkout WordPress)
 
ashley7070 said:
If the net benefit to the individual is zero is it correct to say that the only benefit of drawing the loan agreement is so that the trust can claim the tax deductions?
Click to expand...

In addition to being able to get the money back, the trust can use the money (to generate returns above the interest rate). Returns above the interest rate then form part of the trust's assets and is protected within the trust.
 
oracle said:
What if you are the joint appointer of the trust? Is that not sufficient to not lose control?

Cheers,
Oracle.
Click to expand...

Would depend on the terms of the trust. An appointor would have a large degree of control. But in many trusts their position becomes vacant if they become under a legal disability. This includes bankruptcy or incapacitated.
 
What about an investment loan between a relative and me ? If I have drawn up an agreement with terms and conditions and signed ... can I claim interest as a deduction ?

Cheers ...
 
what rate of interest is in the agreement ?

what is the rate of interest being charged to the individual ?

do the two conflict. if so why ?

how are changes in the loan rate being charged to the individual reflected in the loan agreement to the trust ?

good to have a solicitor look over it to make sure it is correct.
 
alexlee said:
In practice, wouldn't it be:

1) Trust gets the interest deduction
2) Individual claims the interest as income
3) Individual claims the bank interest as deduction

So the net benefit to the individual is zero?
Click to expand...

Yes that is correct if both names on the loan are onlending the money to the trustee.
 
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