If I use equity in an IP I own as a deposit for our family trust to purchase a new IP (in its name) can I tax deduct the interest on the equity loan? If not, is there a "best" way to structure the loans to maximise deductibility?
Just think it thru clearly step by step.
Firstly you and the trust are separate people for tax purposes, say you = A, trust = B
Now if A borrows money and gifts it to B. There interest would not be deductible for A as you cannot claim interest on a gift.
If A borrows and then lends to B. A will be charged interest by the bank. If A then charges B interest at the same rate, or higher, then A should be able to claim the interest charged by his bank. But A will be receiving interest as income from B. So the net affect is A is charged the same as he receives, so no tax. B is paying interest to A on a loan, so B gets to claim this as a deduction, depending on the purpose of the borrowings.
If A were to on lend the money to B with no interest being charged to B, then A could not claim any interest as there is no commercial reason to make a loss like this.
If A were to let his property be used as security for B to borrow directly from the bank, then B should be able to borrow 100% and claim the interest, subject to the purpose of the borrowings.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Just think it thru clearly step by step.Firstly you and the trust are separate people for tax purposes, say you = A, trust = B
Now if A borrows money and gifts it to B. There interest would not be deductible for A as you cannot claim interest on a gift.
If A borrows and then lends to B. A will be charged interest by the bank. If A then charges B interest at the same rate, or higher, then A should be able to claim the interest charged by his bank. But A will be receiving interest as income from B. So the net affect is A is charged the same as he receives, so no tax. B is paying interest to A on a loan, so B gets to claim this as a deduction, depending on the purpose of the borrowings.
If A were to on lend the money to B with no interest being charged to B, then A could not claim any interest as there is no commercial reason to make a loss like this.
If A were to let his property be used as security for B to borrow directly from the bank, then B should be able to borrow 100% and claim the interest, subject to the purpose of the borrowings.
Thanks Terry,
You have presented 4 options:
- A gifts to B. No tax deduction on a gift.
- A loans to B at same interest rate. deduction cancelled out by interest income
- A loans to B at no interest rate. no income, therefore no deduction .
- A lets B use his equity.
So the short answer is no, then?
Long answer is YES.
2. The trust can claim a deduction for the interest.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Long answer is YES.2. The trust can claim a deduction for the interest.
As in the trust can claim a deduction , but I cannot (which was my question).
(By the way thanks for your help and advice again.)
Well, actually it depends on the type of trust. I had assumed it was discretionary.
But if you are using a unit trust it may be possible to claim a deduction, in personal income, for a loan used to buy units.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Well, actually it depends on the type of trust. I had assumed it was discretionary.But if you are using a unit trust it may be possible to claim a deduction, in personal income, for a loan used to buy units.
It is a discretionary family trust
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