Loaning to a discretionary trust

[nathank]

Hi Guys,

Looking for some advice, as I didn't see it covered in my trust deed (and not sure if it needs to be?)

Are there any issues with a trustee loaning to the trust an amount of say $100 (treated as capital) for investment and recalling that loan at a later point in time?

The idea being I want to the trust to keep the return on the investment (i.e. excess cash flow for distribution to other beneficiaries) without needing to declare its a beneficiary as a distribution (i.e. and therefore creating a tax implication).

or is once the capital injection is made, regardless of it being a loan to the trust, its long and gone?

thanks,

-nat

 

[Peter_Tersteeg]

It's really just an accounting process. Someone loans the trust money. At some point the trust repays the debt.

'Someone' could be an individual, or they could be a bank. The rest is just book keeping.

 

[devank]

Does it compromise any protection the trust gives?

 

[Peter_Tersteeg]

A loan is considered an asset to the lender, as it's money owed. If you're the lender and you're sued, I guess the repayments on the loan from the trust would be at risk when the trust makes those repayments.

If the loan was secured by assets in the trust, then they might also be at risk, but probably not if it's an unsecured loan (which it probably would be if you're the lender).

 

[Terryw]

The idea being I want to the trust to keep the return on the investment (i.e. excess cash flow for distribution to other beneficiaries) without needing to declare its a beneficiary as a distribution (i.e. and therefore creating a tax implication).

or is once the capital injection is made, regardless of it being a loan to the trust, its long and gone?

thanks,

-nat

Nat, I don't understand the above bit.

If a trustee does not make a distribution the income retained by the trustee will be taxed at the to marginal rate.

can you give an eg. with some bodgy figures?

 

[nathank]

Can you give an eg. with some bodgy figures?

haha! I was trying to keep it simple. I didnt want to appear i was soliciting tax advice from you for free, so i may be up for dropping a 6 pack around to your office

So the longer story is, what I am attempting to do is have my discretionary trust capture the income from an investment. I know (know, thanks Terry) that at the end of the tax year I need to pay out all income to the beneficiaries. My trust deed allows for me to distribute income to:
"any entity which is tax exempt or a deductible gift recipient under the Act;".

I have an ASG annuity investment, like a school fees funding program, (who are tax exempt) for my children and as part of my family trust investment strategy. I had planned to "loan" a sum of money to the trust who could purchase a term deposit for a period of time. When at maturity, distribute the "income" to ASG as a tertiary beneficiary and recall the loan back to myself.

The benefit is that I can part fund my kids ASG investment with interest earned on the term deposit tax free and then only have to top up the difference with my own cash. AGS doesn't care where the cash comes from, they just want the sum i owe them

So net effect with bodgey figures, looks something like this:
- Loan trust $100.
- Trustee buys a 1 year TD @ %10 (yer i wish!!)
- On maturity, trust receives a $10 interest payment, declared income.
- ASG annual payment due is $100, trustee distributes $10 to AGS
- The awesome parents now only pay $90.

What I wanted to do was avoid having to distribute the $100 back to myself as a beneficiary, rather i wanted my $100 back as a creditor. The advantage being that my kids get $10 of cash rather than $6 plus me paying $4 to the tax man.

While I mention term deposits, I had considered doing it with a stable cash flow property as well... I know you guys mentioned asset protection but for this case, its not a huge consideration for me as i'm in a PAYG job and work in IT... And secondly, this specific trust is for my kids education, I have a separate trust i use for my own wealth creation which i don't toy a lot with

The question was more if anyone see's an issue as i've not a lot of experience with trustees loaning to a discretionary trust.

thanks again,

-nat

 

[Terryw]

Nat,

Interesting, but since the ASG is a deductible gift recipient could you just donate to it and claim it as a deduction instead? (maybe won't qualify as a deduction if it is for school fees).

You may be on a higher tax bracket and save more tax this way.

 

[Terryw]

BTW, the $100 could probably come back to you tax free if the trustee is able to gift the funds of the trust - corpus of the trust woudn't be income.

 

[Terryw]

See s99B ITAA 1936
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s99b.html

 

[nathank]

Nah, they aren't not a deductible gift entity (i.e. not a charity), they an "education fund" which receives different tax treatment as i understand it. I do have a call into their legal beavers to confirm, but the initial conversation seems with them seems to indicate its the case.

Even if I need to distribute the $10 to my kids, I'd still rather do that up to the under 18's threshold ($3k is it?) than distribute it to myself. My punk kids may end up having to spend their first distributions on their educations

Either which way, the loaning to the discretionary trust question is still the same.

 

[nathank]

BTW, the $100 could probably come back to you tax free if the trustee is able to gift the funds of the trust - corpus of the trust woudn't be income.

the only thing is tho, i believe it could be my butt into hot water if i gift myself the $100 every 3 months

 

[Terryw]

Loans would still be the same.

Kids could previous get up to $3333 pa from a trust (2011 fin yr) but they have now scrapped the low income rebate and from 2012 it is much lower - maybe $416 pa tax free.

 

[nathank]

To close off the thread, in case anyone else is interested in doing something similar with ASG...

After reading my trust deed, again, under the tertiary beneficiaries is this:

any church or any religious, cultural, sporting , medical , environmental, research or artistic organisation or entity or any educational institution or school or any organisation or entity which promotes endeavours in any of these fields;

So it looks like what I was trying to achieve will work for me... I can keep the "capital" in the trust which, over time should build up and compounding will increase cash flows... Those "income units" / cash flows I can distribute to ASG as an entity that promotes education (being an education annuity fund) and they deal with the tax as a beneficiary

 

[Rob G.]

Is the fund an endorsed deductible gift recipient ?

Cheers,

Rob