Trust Questions

[regrow]

Hi All

If my trust owes me say $100k and the rent is paid into my PPOR offset account is the rent seen as income or the trust repaying the loan tax free?

Do I still get the normal deductions against my income if the LOC is paying for all costs relating to the IP?

Thanks for any help.

Regards

Regrow

 

[alexlee]

Uh, which entity owns the property?

 

[Ebbie]

I'll have a go at this!

From regrow's post it sounds like the IP is in the trust but the rent from the IP is being deposited directly into his own bank account (to offset the loan against his PPOR). In this case I'd take a guess and say it would be better to have the rent deposited into the trusts bank account first and then transferred to your own offset account as a distribution from the trust.

What sort of trust is it? Is the LOC in your own name? Normally the net rent would be shown as income on your own tax return after the 'normal deductions' relating to the IP have been claimed by the trust. Your questions are hard to answer without knowing any more details.

If your trust owes you $100K it can't repay this loan 'tax-free' out of rent because all taxable income must be distributed by the trust. Loans can be paid back by refinancing against the IP or from non-taxable income (e.g. - when depreciation is claimed by the trust there will be income left over in the trust that doesn't need to be distributed).

Maybe one of the accounting gurus on this forum will confirm this once you tell us a bit more about your situation.

Regards, Ebbie.

 

[regrow]

Hi Alexlee

Sorry should have added more info.

Ebbie

From regrow's post it sounds like the IP is in the trust but the rent from the IP is being deposited directly into his own bank account (to offset the loan against his PPOR).

Thats what I was going to do.

What sort of trust is it?

IP is in a HDT.

Is the LOC in your own name?

Have not set up LOC yet just trying to figure out best way of doing things, but will be in my name.

Your questions are hard to answer without knowing any more details.

What would you like to know? I will try and answer.

Loans can be paid back by refinancing against the IP or from non-taxable income (e.g. - when depreciation is claimed by the trust there will be income left over in the trust that doesn't need to be distributed).

After all cost are deducted IP will still be -ive.

Thanks for the help.

Regards

Regrow

 

[Ebbie]

Hi regrow,

If it is a HDT are there Special Income Units issued with the original loan for the IP taken out in your own name?

 

[regrow]

Hi Ebbie,

If it is a HDT are there Special Income Units issued with the original loan for the IP taken out in your own name?

Yes Though I believe my accountant takes care of this.... Must check though!

Regards

Regrow

 

[Ebbie]

Yes Though I believe my accountant takes care of this.... Must check though!

Normally in a HDT the individual borrows the money from the bank and buys Special Income Units in the trust. The trust then uses these funds to purchase the IP. The loan interest is deductible to the individual because of the SIU's and the interest payments are the only expense claimed by the individual.

The rent is received by the trust and the trust pays all other IP expenses (except loan interest as mentioned). Since the interest isn't paid by the trust there should be positive cashflow left over to distribute to the Special Income Unit Holder. Any depreciation is also claimed by the trust and since this is an 'on-paper' expense the trusts taxable net income will be less than the actual net income left in the trusts bank account. The remaining non-taxable funds are not distributed and can be used to repay the individuals loan to the trust.

The income distributed to the SIU probably won't be enough to cover the interest on the loan so the individual can then claim negative gearing benefits.

I'm not sure why you would want to use a LOC to pay the IP expenses in your own name, but you should definitely find out if there are Special Income Units issued before you do anything else!

Ebbie

 

[regrow]

Hi Ebbie

I'm not sure why you would want to use a LOC to pay the IP expenses in your own name

I have read about people paying for the IP's from LOC's. What I was thinking was to pay all my investment costs relating to the IP from the LOC without using after tax income to do so, and to use my after tax income to pay down my PPOR, maybe I have missed something?

but you should definitely find out if there are Special Income Units issued before you do anything else!

Have not gone ahead with anything yet, just trying to figure things out first.

The loan interest is deductible to the individual because of the SIU's and the interest payments are the only expense claimed by the individual.

Yes the interest is the only expenses I have to pay.

Your explanations are great thanks for clearing things up a bit

Regards

Regrow

 

[Ebbie]

I have read about people paying for the IP's from LOC's. What I was thinking was to pay all my investment costs relating to the IP from the LOC without using after tax income to do so, and to use my after tax income to pay down my PPOR, maybe I have missed something?

OK, I see what you are saying. Since the IP is in the trust maybe the LOC would also need to be in the trust? If all IP expenses were paid from the LOC it would leave more income to be distributed to the SIU holder but they would then receive a higher taxable income so it might not be such a good idea!

Can any of Somersoft's trust gurus comment on this? You should probably check it out with your accountant.

Your explanations are great thanks for clearing things up a bit

No problem Regrow, glad it makes a bit more sense.

 

[regrow]

OK, I see what you are saying. Since the IP is in the trust maybe the LOC would also need to be in the trust?

I would also assume the LOC would need to be in the trust but maybe in my name as I hold the loan in my name?

If all IP expenses were paid from the LOC it would leave more income to be distributed to the SIU holder but they would then receive a higher taxable income so it might not be such a good idea

Can I not use the discretionary part and distribute to my wife as she is also a beneficiary? She does not work so would be paying less tax untill she is on the same tax rate as myself.

Regards

Regrow

 

[Ebbie]

I would also assume the LOC would need to be in the trust but maybe in my name as I hold the loan in my name?

I think this is different because as I mentioned before the trust should be paying all IP expenses (the only exception is the interest on the loan used to buy Special Income Units).

Can I not use the discretionary part and distribute to my wife as she is also a beneficiary? She does not work so would be paying less tax untill she is on the same tax rate as myself.

If there are Special Income Units issued the 'discretionary part' of the trust may not apply as the SIU holder has an entitlement to the income.

 

[Interested]

Hi
What is a LOC? and PPOR?

 

[Ebbie]

Hi
What is a LOC? and PPOR?

Hi Interested,

LOC = Line of Credit loan
PPOR = Principal Place of Residence

 

[Interested]

Thanks Ebbie now I can understand it a bit better. I'm only new to this and still haven't got the short cuts.

Thanks again for your help.