Hello,
I have an investment property with a loan from bank for $300,000. I have $50,000 in my family trust account, which I want to borrow and put it in investment loan offset account.
The interest I pay to trust account for $50,000 will be the same as the bank interest.
Thank you.
Hi MrHyde, thank you for the reply. I assume, if I take a loan from trust and repay the investment loan (instead of putting it in offset), the interest I pay to trust is tax deductible? I am not clear how it works with offset account. Thanks.
An offset account is just a transactional account where the funds can be used for any purpose - it is not a repayment of a loan - it just reduces the interest on a linked loan.
I am also not sure that repaying an investment loan with another loan would make the second loan tax deductible. Can you point me to the ATO site where it says that? Or maybe an accountant can chime in.
BTW, the ATO page on interest on loans is at https://www.ato.gov.au/Individuals/myTax/2018/In-detail/Rent…
thank you, my knowledge in this subject is limited. Just exploring various options…May be a question for my accountant..
Why not? The trust would then need to pay income tax (47%) on the interest earned.
don't see why not,
trust pays 47%, unless this income is dished out to a beneficiary who would then pay their tax rate.
Tax deduction is determined on the purpose of the loan; not which bank account the money is put into. The way I see it; the loan is not being invested into anything. How is putting it into an offset account earning the person who took the loan any income?
No question that the trust will need to pay income tax on the interest earned. That would be the case no matter what reason the loan was taken out for.
thank you for the reply, the trust distributes any interest earned to members.
Isn't that taking money from the left hand (trust) and putting it into the right hand (personal use)? Problem is tax man gets a cut*.
*Subject to your tax rate; assuming trust beneficiaries have taxable income of >$21,884
This also sounds a lot like a Director's Loan and the trust may have additional reporting requirements. Not sure on that at all - just know Directors loans are complicated in an Company structure; maybe same in Trusts.
If you have a properly written contractor and also commercial interest rates (zero interest loans could be a fringe benefit) there probably isn't a reason why you can't do it (provided trust declares the income).
thank you netjock, need to explore further..
https://www.smh.com.au/money/investing/investors-falling-fou…
"It is a fundamental financial principal that you can only obtain a tax deduction for interest on a loan if the purpose of that loan was to buy an income-producing asset such as a rental property or a share portfolio. If the purpose of a loan is for a private purpose, such as paying off your home or to go on a holiday, you cannot claim the interest as a tax deduction."
The way I see it; taking a loan from the Trust and putting it in the investment loan account would count as paying off your home (or investment property); as such interest on that would not count as a tax deduction.
Your home and your investment property are two very different things.
OP will need to seek the advice of an accountant. The challenge here will be "related parties" and this is where the idea may come a cropper. The problem here (as has been mentioned above) is that by not charging a commercial rate of interest on the loan from the trust (that would effectively be at least equivalent of interest charged by the bank) the ATO may strike down the structure and either deny deductabilty or deem it to be the equivalent of a director's loan and require much higher rates of interest to be charged by the trust.
If it was not a related party transaction, there would be absolutely zero to prevent OP effectively refinancing a part of the investment loan (which is what this idea is actually all about) and maintaining tax deductability.
Thank you Seraphin7.
The problem here (as has been mentioned above) is that by not charging a commercial rate of interest on the loan from the trust (that would effectively be at least equivalent of interest charged by the bank) the ATO may strike down the structure and either deny deductabilty or deem it to be the equivalent of a director's loan and require much higher rates of interest to be charged by the trust.
OP mentioned that the loan would be charged the same interest as a bank loan? Directors loans interest don't need to be higher than what you get at a bank.
I read that as the same as the interest on the deposit. I'm not familiar with all the ins and outs of directors' loans … hence my suggestion to refer this matter to an accountant … although I am aware that the ATO publishes benchmark interest rates that would at least need to be considered in circumstances such as this.
What did your accountant say? - It never ceases to amaze me that on such important issues such as this people seek free, unqualified advice
Remember the old saying - "free information is what you pay for it……"
If you use the loan for an investment it doesn’t matter what the source of the loaned money is.
If you borrowed $50k from Cash Converters could you claim it (I think the answer is yes, as it is effectively refinancing part of your mortgage).
Within the trust the repayments are income that must be distributed for tax efficiency.
The answer to your query is YES.
Short answer No.
The question to ask, "What is the purpose of the loan from the Trust Account". Seeing as you would have already got the initial loan to cover the investment property - I don't see how taking $50K and putting it in an offset account would count as a loan for an investment.