Hi Jason

What about my example where the loan is paid down by $100,000. If S then later wants to buy a place to live in then what would happen?

eg. 1
$100,000 would be availabe for redraw. S takes that money and uses it as deposit for the new house. But since this is personal borrowing the interest on the $100,000 would not be deductible.

eg 2.
$100,000 had been paid into an offset account instead of the loan. He takes this out and the interest on his investment loan would increase. That would mean the equivalent of obtaining a tax deduction on $100,000.
The interest on $100,000 is approx $7,000 pa. If S was on the top rate that would mean saving of around $3000 pa in tax.

Now imagine the exponential effect and image the added effect if the amount was larger.

Assuming S is not a spendshrift and can control his urge to spend the large amount of money in the offset, keeping the money there instead of in the home loan result in the exact same amount of interest savings.

The only difference is that he may be able to get a slightly cheaper rate by having a cheap no frills type loan with no offset facility.

There are restrictions on smsf buying assets from members – cannot acquire residential property etc from a member.

There would also be stamp duty and CGT consequences of transferring property (ie real property such as land) into a SMSF. However, if you had a property owned by a unit trust it may be possible to transfer the units to the SMSF if the property is unencumbered, and it also may be possible to do so without stamp duty in some instances.

That would me under trustee powers

Actually it is not a good idea to pay down loans, especially investment loans. This is because your money will be tied up in the loan and won't be accessible without adverse tax consequences. It is good to pay down debt – but not tax effective

A better way would be to set up a IO loan and a 100% offset account attached for all spare cash.

Otherwise imagine what would happen if you had paid down the loan by $100,000 over a few years and then deciced to buy a house to live in.

If the trust deed allows it the trustee may make gifts.

A gift is not returnable.
A loan is.

I think you should probably charge the trust interest if you are onlending money.
If you are gifting money to the trust then there is no interest on a gift.
If you had cash you could still lend the money to the trust interest free, but a gift is probably better.

1. The trust should pay its own loans. If it hasn't got enough cash to do so it could borrow from you, or you could gift. Don't forget you are not the trust and the trust is not you. so you shouldn't be paying from personal to trust etc as this would look like there is not trust in existance.

2. If you pay the loan down by $50,000 then this is really just refinance one loan (the bank) with another (you). If you gift the trust $50k and it pays the loan down then the trust assets would have increased by $50k. Whether you charge interest or an interest free loan or a gift is up to you and your situation.

Hawko,

It is a pity you didn't get some legal advice as you may have been able to setup a post death testametnary trust and transfered the money to the trust. Any income from this trust fund could have had large tax advantages and asset protection advantages.

The first thing lawyers think of is covering their arses. The second thing is covering the client's arse!

Another thing to consider is future relationship break downs (a trust may not help in this regard, but could). And, if Hawko dies then attacks on his estate, family provision claims etc. Having the money in a trust can assist in keeping it out of reach.

Hi Carlo

If you are borrowing money to give to the trust then things are different. You will be charged interest and would want to claim this. The only way to do so would be to charge your trust the same or more interest. Other wise you couldn't clam the interest.

If it was just cash you had, then I would just gift it. If you lend the money it is always yours. If you later went bankrupt it would be repayable back to your creditors. (even if gifted it can be clawed back in certain circumstances, but would be much safer). If gifted and the trust pays you interest then you are just getting a higher taxable income with the trust decreasing its income. You generally want it the other way around to make things more tax flexible.