Please help me with discretionary trust.

[tropic]

I have been reading a couple of Family Trust books and I still can't find an answer to this question:

If I purchase a property under a (hybrid) discretionary trust can I negative gear the interest cost? So far the answer is NO?
My understanding is that I can place the property under a trust and it then can borrow money from myself. In turn I can borrow money from a bank. The trust then pay me interest cost for the borrowing which will be the same with my personal interest cost to the bank hence I am not gaining any tax deduction here.
The trust then will run at a loss (it's not CF+) but it can be carried forward within the trust. It will not get a benefit of negative gearing since I can't distribute the loss to myself.

Am I correct here?
I just bought a property that will settle in 6 weeks and I have it under my name. I also contacted my accountant and she said the same thing, no gearing benefit.

How can I get a gearing benefit and have the property under a Trust?
Am I and my accountant missing something here.


Your answer is much appreciated.

 

[The Y-man]

I have been reading a couple of Family Trust books and I still can't find an answer to this question:

If I purchase a property under a (hybrid) discretionary trust can I negative gear the interest cost? So far the answer is NO?
My understanding is that I can place the property under a trust and it then can borrow money from myself. In turn I can borrow money from a bank. The trust then pay me interest cost for the borrowing which will be the same with my personal interest cost to the bank hence I am not gaining any tax deduction here.
The trust then will run at a loss (it's not CF+) but it can be carried forward within the trust. It will not get a benefit of negative gearing since I can't distribute the loss to myself.

Am I correct here?
I just bought a property that will settle in 6 weeks and I have it under my name. I also contacted my accountant and she said the same thing, no gearing benefit.

How can I get a gearing benefit and have the property under a Trust?
Am I and my accountant missing something here.


Your answer is much appreciated.

In the case of an HDT my understanding (and this blurb is thus very limited) is that you borrow money to buy "units" (similar to "shares") in your trust.

If the trust has intention to distribute profits, it can be seen as an income generating investment. Therefore the interest payable on the money you borrowed to buy the units should be deductible against your taxable income.

Hope this helps,

The Y-man

 

[willy1111]

Hi Tropic,

if you do a search for trusts - you will find millions of posts on this same subject.

With a HDT you borrow in your own name and the property is provided by the trustee as security for that loan. So the loan is in the name of Mr and Mrs and the title is in the name of XYZ Pty Ltd (atf the trust)

The trust has no debt, but gets a rental income. Against that rental income we have all the usual expenses such as rates, insurance, maintenance, but not the interest. The trust therefore has an income to distribute.

The income is distributed to the income unit holder (you as the borrower) and the interest you have paid is then deducted against your earnt and unearnt income. Voila - neg gearing in a trust.

Cheers

 

[GreatPig]

The trust then pay me interest cost for the borrowing which will be the same with my personal interest cost to the bank

As the others have stated, the idea is that you borrow the money and buy units in the trust, rather than on-lend the money to the trust.

The trust will then distribute to you (the unit holder) all net income generated by the assets purchased with the funds, which will be less than the interest costs when negative gearing. Consequently you personally will have a net loss, which will be tax deductible provided the units are income-producing (ie. have been used to buy income-producing assets - like rental property).

This is just my personal understanding, and you should seek professional advice for your specific situation.

GP

 

[quiggles]

Your accountant may well not be familiar with HDTs or s/he would have known the answer to this. I'm not an accountant, so the following is not advice.

To illustrate the principle to your accountant, assume that instead of a HDT, you have a unit trust. You borrow to buy the units, therefore the interest cost is a tax deduction for you. The loan is secured against the house (because the bank insists and the trust allows you to do this). Because the trust is not paying interest, the house will make a profit, unless it's a real dog. The trust passes its income to you, which you declare. Your asset is secure, you are paying the righ amount of tax, and all is well with the world.

The HDT benefits expand on this, by giving you flexibility in regard to separate investments and n regard to capital and income distributions. NickM on the forum knows his stuff in this regard, and gave a terrific talk about it at the Canberra Region Investors Group last weekend.

 

[paradox]

Link to info

Just received newsletter from a Sydney accounting group with link to their website with info on whether interest is deductible against personal income should the loan is held in the trust name.

http://www.chan-naylor.com.au/?w1Z1K&9PFh&jTs&6xI&cr&eVh&ch

No recommendation is intended as I am myself on the look out for a good advisor for setting up my structure properly.

 

[JamesGG]

Hi Paradox,

First of all, I realise Chan is a common surname, but, it does bother me that the link you posted shows me as being logged in as Kwan Chan. Any relation to Ed, by any chance?

Secondly, you may wish to edit or remove that link, as I was one click away from being able to change your login details.

Thirdly, and most importantly, I am a fan of how Ed promotes his aggressive tax planning, similar to a small number of other accountants I know. BUT, a recent piece of advice that he is promoting is very, very dangerous. Along the lines of that link you posted, Paradox, Ed has been recommending that his client's can personally claim the interest on a loan held by the trustee company used to buy property in the HDT.

I am not alone in thinking that his logic is incorrect. The tax laws simply do not accomodate that line of thinking. And, if nothing else, this strategy has not yet been proven as legal by the courts - and I suspect that when the time comes, it won't be.

I'll concede, I may not be the country's foremost expert on tax law. So, ask DaleGG, NickM, Chris Batten or Frank Carnavale (QC) what they think of Ed's logic.

Be careful.

James.

 

[tropic]

Now I understand how it works except I have bought a property under my name that will settle at the end of the month. Well maybe for the next one.

Thanks everyone.

 

[Chilli]

Trust borrows from bank to lend to you

Tropic,
I bought a IP in my name. We have a Disc trust with 2 other IPs in it.

Our arrangement is : trust borrow money from bank at 6.5% and then lend it back to me at 12% (I was explained that trust can lend me money at a high rate of 12% because this is a "nonsecured" loan) .
I therefore can claim tax from the 12% interest which is quite a lot.
This was recommended to me by a well known international accounting firm so I hope it is all legal.

Hope this may help you.

Regards,

 

[asdf]

Hi Salsa,

Thats very interesting but could you please clarify what you mean by that? Does that mean the bank lends money to the trust and you personally buy the IP after the trust then on-lends it to you? What does that achieve? I don't think thats what you're doing but I just got lost there with the trust lending you $ at a high rate.

We have a DT but there is a +'ve CF property in there so no need for negative gearing benefits. But I suppose I can see the use of this structure once you already own the property within a DT. Price increase, revalue, draw-down excess funds from the bank via trust and then on-lend to us at high rates.

 

[keithj]

Our arrangement is : trust borrow money from bank at 6.5% and then lend it back to me at 12% (I was explained that trust can lend me money at a high rate of 12% because this is a "nonsecured" loan) .
I therefore can claim tax from the 12% interest which is quite a lot.

Hi Salsa,

What's the purpose of the funds the trust has lent you @ 12% ? What did you personally buy & what income does it produce ?

KJ

 

[paradox]

Our arrangement is : trust borrow money from bank at 6.5% and then lend it back to me at 12% (I was explained that trust can lend me money at a high rate of 12% because this is a "nonsecured" loan) .
I therefore can claim tax from the 12% interest which is quite a lot.

Salsa:

I believe what you are trying to do is to try an save some tax on your personal side and retain the difference in interest rate in the trust where you can distribute it according to your situation or wish, is that correct? It would be similar to a service trust kind of arrangement then...

Kwan

 

[Chilli]

Hi all,

DIsc Trust does nothing other than having the 2 IPs. Not running a business or anything.
My 2 IPs (says IP1 and IP2 under the Disc Trust produce a paper lost. Because it is a disc trust I can not claim any tax deduction on this loss.

Trust took a loan from bank at 6.5% and then lend to me at 12% for me to buy IP3. This loan is secured by the IP1 under trust and my PPOR. Purpose is for trust to makes some profit in charging me 12%, which is cancelled out by the paper lost from the IP1 & IP2 under trust anyway. So trust income becomes neutral . Trust can legally charge me this high interest rate because I borrow money from trust without having any security (I own the IP3, trust does not own it or have a mortgage on it).
I have a freehold title of IP3 and still have an investment loan on it. It is THE PURPOSE OF THE LOAN that counts not what is being mortgaged I believe.

Meanwhile for my personal tax I can claim a lot of tax deduction on the 12% interest I pay trust. If I go to bank and borrow money to buy the IP3 as usual I would get less tax deduction.
The IP is a normal house in a very inner city suburb hence very negatively geared. I bought this IP from my partner (PPOR becoming IP) for a as high price as possible within reason, for tax purpose (long story) .

So the total effect is a going-around-way for me to claim some tax back from the lost of the 2 IP under trust, which I cpuld not do directly coz it is a disc trust. If it was a Hybrid Dis Trust then it could be done differently and I would not have to do all this . But when I initially had the trust created (5 yrs ago) I did not know that HDT existed and my other accountant did not know either !!!!

 

[paradox]

First of all, I realise Chan is a common surname, but, it does bother me that the link you posted shows me as being logged in as Kwan Chan. Any relation to Ed, by any chance?

Hey James!

Never imagine someone would actually think I am linked to Ed or maybe even his altered ego by posting the link!

Chan is a LOT more common than you think!!! Much much more than Smith. In fact as Chinese, we do not think of it as being "common" but rather a "BIG" Surname as they came originally from the corresponding big tribes or kingdoms that made up China a long long time ago. I am more related to Jackie Chan than Ed, but only because my brother once cameo in one of his movie made in Brisbane!

In fact, I wish I had been linked to some accountants so that I would not be so stucked now. I have purchased all my IPs and PPOR in our own names and am feeling very vulnerable right now. At the moment I am reading up frantically everywhere on the subject of Asset Protection and just received Dale's(Your dad I believe?) two books in the mail and will check out Chris Batten's website very soon. Ed Chan's stuff came with one of Han Jakobi's promotion that I looked into. I have yet to decide what exactly to do or who to go with in my situation and have to do it real soon before I make the next purchase.

I am glad that you have given your view on what Ed Chan was promoting, as being a layperson I could have just taken that onboard as being 100% correct, coming from an accountant. And that was the idea of putting it in the open to see what the other forum members make of it, and see if there are any alternative views. I did make it clear that it was not intended to be a recommemdation as at present I myself am feeling more than a little lost.

Secondly, you may wish to edit or remove that link, as I was one click away from being able to change your login details.

Yet I do not feel it appropriate nor necessary for me to have to make any changes to what I have posted as I did not post that link to promote anything for my own benefit. I also believe strongly that all forum members should be allowed to post and have assess to different info and opinion and make up their own mind on what is correct and right for them.

Unless, as a newbie in this forum, I should just do as I have been told whenever I am threatened that my login details would be changed? I understand your concern, James, but do you think that comment was appropriate? And should one forum member have the power to change another's login as he/she see fit?

Any comments from the others?

Cheers
Kwan

 

[JamesGG]

Hi Kwan,

Whoa, hang on a sec... I was not threatening anything in any way, shape, or form, merely alerting you to the fact that your membership at Ed's site was vulnerable because there is a big button through the link you posted that could allow one to change your details, if one has the inclination. Not only that, but I have no power here on Somersoft, and I suspect there is a very good reason for that!!

My sincere apologies if you felt threatened by any of my comments there.

Also, I have no problems with you posting the ideas and information provided by other accountants. That would just be silly and niave of me.

And, as I said, was curious about the surname. No offense intended. Please understand though that we have had people come to this forum purely with the intent of advertising. With only 8 posts to your name, I just wanted to be sure.

Lastly, to clarify, much of what Ed says in the strategy you posted about is correct. I simply took the oppurtunity to point out the danger with his line of thinking on one particular aspect.

Regards,

James.

PS - Salsa, you are correct. It is the purpose of the loan that is relevant, regardless of what the security is against.

 

[paradox]

Whoa, hang on a sec... I was not threatening anything in any way, shape, or form, merely alerting you to the fact that your membership at Ed's site was vulnerable because there is a big button through the link you posted that could allow one to change your details, if one has the inclination. Not only that, but I have no power here on Somersoft, and I suspect there is a very good reason for that!!

Wah Hahahhahahaahahaaahahaha!!!!!!

Sorry James... being a bit too touchy back there... I have seen how unfairly some of the newbies have been treated as posters or solicitors for their business here and in other forums.... so I thought you were going to ban me somehow from logging in HERE rather than telling me for my benefit that the link was a "already Logged in" link! Instead I should have been thanking you for alerting me to the fact! (now how the heck does one edit his post...hmm...)

Sorry again, mate! I feel so stupid now! Hahahahaa!!!

 

[paradox]

Too late... cannot edit my post earlier. The account is really only a newsletter subscription anyway and there are no important info in it.

 

[coastymike]

I had the same concerns as James. The the link gives a person direct access to the user section of Chan & Naylor. Initially I thought it might be only for those using Chan & Naylor services but it seems like anyone can join. I was more concerned about any rights attached to your username and password as a member of the site but there doesnt seem to be anything which says you cant allow others to use your username and password.

James i also agree with you. I think Ed is arguing that it is ok for the trustee company to have the loan and for the individual seeking the interest benefits to make the payments on behalf of the trustee. I would argue that if the property is actually being held by the trust and making other payments (e.g. agents commission fees, insurance, etc.) then I would think that the ATO would argue that the interest payments made by the individual were on behalf of the trust who held the property (similar to a bare trust). That is the interest on the loan is deductible to the trust and not the individual. This would therefore negate the negative gearing benefits as the trust would still end up in a loss position. I could be totally wrong as to what Ed is recommending but is certainly something that I want to clarify with Chris Batten. I dont like objecting to any concepts until all facts are known but I still prefer the method of issuing special income units to the individual seeking the deduction and that loan being in the name of the individual. Doesnt Ed's strategy also make the refinancing principle redundant. This is a fantastic opportunity to convert non deductible debt to deductible debt but would not be available under this strategy.

 

[DavidMc]

Any updates on the this issue:

BUT, a recent piece of advice that he is promoting is very, very dangerous. Along the lines of that link you posted, Paradox, Ed has been recommending that his client's can personally claim the interest on a loan held by the trustee company used to buy property in the HDT.

I am not alone in thinking that his logic is incorrect. The tax laws simply do not accomodate that line of thinking. And, if nothing else, this strategy has not yet been proven as legal by the courts - and I suspect that when the time comes, it won't be.

I'll concede, I may not be the country's foremost expert on tax law. So, ask DaleGG, NickM, Chris Batten or Frank Carnavale (QC) what they think of Ed's logic.

Also - what is this strategy?

Doesnt Ed's strategy also make the refinancing principle redundant. This is a fantastic opportunity to convert non deductible debt to deductible debt but would not be available under this strategy.

 

[DaleGG]

Hi

I totally and utterly disagree with Ed Chan on this issue. Furthermore, I have spoken to NickM and he also disagrees with Ed Chan.

Ed has been asked to provide legal proof to support his argument and to date he has provided nothing more than his assertion.

I strongly recommend that you step very carefully and seek good advice before following Ed Chan's advice with regard to the loan being inside a HDT and you claiming the interest.

Dale