Hi Dale,
You've told me what, now please tell me how?
You've told me what, now please tell me how?
Split loans
- Thread starter Jerry N
- Start date
Hi
OK, there are two ways this can work.
A trust often owes money to the beneficiaries of the trust because it has distributed the profit by book entries and not by cheque. If the trustee takes out a new loan, using the properties owned by the trust as security, then the interest on that loan will be tax deductible.
Otherwise, if the trust is a hybrid trust then the trustee can borrow money against the properties owned within that trust and redeem the units of ownership of the hybrid trust.
Both ways, the individual gets the cash to do with as he/she pleases and both ways the interest on the loans is still tax deductible - even where the loan has already been repaid previously.
Does this make enough sense?
Have fun
Dale
Yes. I understand it.
I have one final question...
If I owned an IP and borrowed funds against the IP and then used those funds for private purposes then the interest costs would not be tax deductible.
But if a trust[ee] borrows money against the IP, I presume from your comments it pays this to the beneficiary/unitholder (depending on type of trust) and beneficiary/unitholder can do what they like with the money (eg. holiday/boat/car etc), but in this case the interest is still tax deductible?
I'm curious why one is treated differently from the other? Is it simply too difficult to trace because the money passes from one entity to another, or another reason?
Is this kind of info in your Tax Battles manual? I'm contemplating buying it...
I have one final question...
If I owned an IP and borrowed funds against the IP and then used those funds for private purposes then the interest costs would not be tax deductible.
But if a trust[ee] borrows money against the IP, I presume from your comments it pays this to the beneficiary/unitholder (depending on type of trust) and beneficiary/unitholder can do what they like with the money (eg. holiday/boat/car etc), but in this case the interest is still tax deductible?
I'm curious why one is treated differently from the other? Is it simply too difficult to trace because the money passes from one entity to another, or another reason?
Is this kind of info in your Tax Battles manual? I'm contemplating buying it...
Sim
Administrator
It's all to do with "purpose of the funds".
When you yourself borrow money for private use - it's private and hence non-deductible.
When the trust borrows money to pay out a loan to a beneficiary, the interest on the borrowed money is deductible - because it is doing what trusts must do - paying out beneficiaries what they are owed.
What the beneficiary does with the money is of no consequence to the trust. The trust neither knows nor cares whether you used the money for private use or not - it is totally irrelevant to the accounting of the trust.
Think of it this way. Say you owned shares in a managed fund (ie. a unit trust), and the fund needed to distribute some money to you for whatever reason. Now perhaps they may decide that it is better to borrow the money to make the distribution than to sell some units or whatever. You take the money and go spend it on a personal holiday - totally private use of the funds - but that doesn't matter to the trust. The trust doesn't care what you do with the money - it was merely meeting its obligations to you in paying you the money.
Is a "loan" technically required, or is that just the example? I mean does the trust have to "owe" the beneficiary money? Can the trust borrow money to pay a beneficiary even if it doesn't owe them?
The reason I ask is that usually isn't the payment into the trust (t purchase a property) by means of "gifting" the money to the trust, for asset protection reasons (otherwise I understand the trust could be forced to "pay up" what it owes someone).
In that case isn't the ideal situation for the trust to not owe anything to the beneficiaries?
I found this at the source.
http://www.wealthoptimiser.com/example.htm
It would be good if the pdf was on a spreadsheet so you can play with the numbers.
Mike, care to post yours?
Jas
http://www.wealthoptimiser.com/example.htm
It would be good if the pdf was on a spreadsheet so you can play with the numbers.
Mike, care to post yours?
Jas
Hi Jas,
I used a number of online calculators to help me crunch the numbers so don't have a specific split loan spreadsheet as such. If you think it may benefit people I can try to cobble a spreadsheet together. Don't hold your breath, though as I'm no spreadsheet expert. Willing to give it a go, though.
Regards, Mike
I used a number of online calculators to help me crunch the numbers so don't have a specific split loan spreadsheet as such. If you think it may benefit people I can try to cobble a spreadsheet together. Don't hold your breath, though as I'm no spreadsheet expert. Willing to give it a go, though.
Regards, Mike
I can do so if you like - but what do you want to *see* in the spreadsheet?
Jas,
You're referring to http://www.wealthoptimiser.com/spreadsheet.pdf I assume.
I'm going to be busy this w/e, I can look at it after.Not sure how I can do yet, it's just a quick look.
Hi Kevin,
I think Jas would like to see the layout and results displayed as per the PDF doc except the variables such as Loan Amount, Interest Rate, Loan Term, Marginal Tax Rate, Tax Benefit Reinvested? be able to be input to show different scenarios.
An advanced model could include the effect of refinancing to change the interest rate or changing the IP loan to Interest Only midway through the term.
Regards, Mike
I think Jas would like to see the layout and results displayed as per the PDF doc except the variables such as Loan Amount, Interest Rate, Loan Term, Marginal Tax Rate, Tax Benefit Reinvested? be able to be input to show different scenarios.
An advanced model could include the effect of refinancing to change the interest rate or changing the IP loan to Interest Only midway through the term.
Regards, Mike
Spreadsheet available for download
You can download the Wealth Optimiser spreadsheet at http://www.somersoft.com/forums/showthread.php?postid=38154#post38154
You can download the Wealth Optimiser spreadsheet at http://www.somersoft.com/forums/showthread.php?postid=38154#post38154
