A trust is where A owns something for B.

Easiest way to understand is to think of a parent opening a bank account for a 2 year old. The parent is the legal owner of the account, title is in the name of the parent. The parent is the trustee. But it is the 2 yr old who really owns the money. 2 yr is the beneficial owner or the beneficiary.

So a trust is where the legal ownership is separated from the beneficial ownership.

If mum goes bankrupt can they take the money in the account? Generally not because she is just holding it for 2 yr old.

Similar with property. You will have a trustee, which could be a company or a person. But you will also have many beneficiaries. The trustee just owns the property, legally, for all the beneficiaries of the trust.

Where it is good is that the income of the trust can go to any beneficiary (under a discretionary trust). So the trustee (which you want to be or to control) decides to distribute the income to the lowest tax payers of the group – the potential beneficiaries may be hundreds of people but the ones that control the trust will generally limit the distirbutions to benefit their close family.

It is good with bankruptcy too. Because if any one beneficiary were to go bankrupt the trustee would simply not give them any money while they are bankrupt – otherwise it would go to creditors. If the trustee were to go bankrupt then the trust assets don't belong to them so they are generally not able to be taken.

But if you are looking at buying real property then there are many things to consider – trusts generally pay more land tax. The trust is a separate tax entity so any loss cannot be used to offset your personal income. Also trust taxation law is very complex so higher fees.

Fixed loan may complicate things.

Can you give some rough figures of what the portions used were?

Ok, mayor quinby here.

You have accidently ended up with a mixed purpose loan by combining business with pleasure. But all is not lost because the ATO will allow you to split the loan and recover.

In my eg above you had a $100,000 loan.

You could simply split this up into 2 separate loans of
$10,000 for the investment and
$90,000 for the main residence.

Then you can relax and start paying the $90,000 loan down asap and saving non deductible interest while maximising deductions.

Hi Adrian sorry didn't mean to scare you!

You can generally claim costs associated with running a home office but not rent unless you are self employed. The office needs to be your place of business.

What you have done is to create a mixed loan.

eg you had $90,000 outstanding on your PPOR loan.
You borrowed $10,000 from redraw and used for investment

This is just a $100,000 loan in which 90% of the interest relates to the PPOR and 10% to the investment. So 10% of the interest each month should be deductible.

But, there is a problem because any repayments you make to this loan will need to be apportioned. So if you pay $1000 per month then $900 needs to come off the PPOR portion and $100 off the investment portion.

This is not ideal as you will be paying down investment debt when this could be coming off your PPOR debt.

So, what I suggest you do is to split your loan asap. You will then be able to divert more money to paying down non deductible debt and improve your tax position. It will save you thousands over the years.

You might even take the opportunity to refinance and get a better rate while improving the structure too.

Yes. they can't demand payment.

yes, a beneficiary cannot influence or control a discretionary trust (unless they are also the trustee).

Setting up a trust won't prevent conflict because there will still be decisions to be made by the trustee. So C could not like these decisions and complain to A – but be not able to do anything legally because a beneficiary of a discretionary trust has no right to income just the right to be considered.

Steven,

Unless person C is disabled he or she cannot be a beneficiary of a SDT. B can if B is disabled – under the definition in the act.

Setting up trusts costs money. You need advice as well. It may be expensive but the tax savings and Centrelink benefits will make it worthwhile – plus other benefits such as estate planning, asset protection and the fact knowing that the disable relative will be looked after if the trustee or parents etc die first.

Whether you have other trust for non disabled persons to benefit is a different matter to consider.

Trustees cannot be beneficiaries of an SDT for a few reasons:
– An SDT is a special trust that is defined in legislation
– An SDT is set up for the disabled person to benefit and must have only one beneficiary (i think)
– A trustee cannot hold something on trust for himself – there would be no trust as the defintion of a trust is A holding property for B.

Generally a trustee can be a beneficiary of a discretionary trust or a unit trust – but not the only beneficiary.

Possibly you could transfer a % to the trustee of the SDT and yourself as tenants in common. But then you have to watch out for capital growth down the track.