The question I have relates to loans from individuals (husband and wife) to a related Discretionary Trust.
The scenario is as follows:-
- Currently the Discretionary Trust has loans in its own name with a bank totalling $1m. These funds are used for investment purposes.
- To take advantage of cheaper lending rates, the husband and wife propose to take out a resi loan through a finance institution such as Suncorp using their residential home as the primary security. Note : this home currently has no home loan against it.
- After receiving the funds from this loan, they propose to lend these funds to the Trust at an interest rate that is their bank loan rate plus 0.1%
- They will do this via a formal loan agreement with the Trust.
- To clarify, the $1m lent by the husband and wife would discharge the current bank loan which the Trust has.
- Note : the Trust has multiple investment assets and its primary beneficiaries are the husband and wife.
Questions : Are the following assumptions correct:-
- If the money is lent to the Trust by formal agreement and is done so for a profit (albeit small), can the husband and wife claim a tax deduction for the interest paid to their financial institution, and declare the interest income received from the Trust, i.e. the husband and wife make a small profit?
- We have historically been told that the husband and wife, to get a tax deduction for interest, must onlend the money for profit – is this correct?
- The Trust, like any other entity, will claim the interest paid as a deduction.
- Consideration is being given to have a similar situation but the husband and wife would lend money to another related Trust whose sole asset is a rental property. Would the treatment of interest income and expense be treated any differently to the above?
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1,229 views
2 replies