All Topics / Help Needed! / Funding to start a trust

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  • Profile photo of rusty05rusty05
    Member
    @rusty05
    Join Date: 2011
    Post Count: 94

    Hi wise ones,
    I have a question I hope someone much more intelligent than myself can answer….

    I'm seeing my accountant on Friday to extend our non-property related business and have 2 options: (It's for primary production purposes)
    1) increase the current Line of Credit/Overdraft (secured by the land) which is in my name by $30,000 for new expenses and have the increase in profit of around $15000 pa added to my personal income tax with the balance paying off the $30000.  I'm on a high tax bracket from my 'real' job. In a few years the $30000 would be paid off and then I could begin to pay down the mortgage on the farm (tax deductable) or invest in more property.

    Or

    2) Start up another small primary production business in a trust, borrow the $30,000 using the existing land as security and have the profits return to the trust.

    In both cases the loans attributed to the farm would increase by $30000 but the aim would be to pay that $30000 back over the next 2 or 3 years so that any extra money made from the new venture after that could be used to invest in property. I could still use the farm as security but also have a very small income stream in the trust of around $15000 which would be in addition to my wage.

    My question is this: If I go with the trust option how does the trust repay the $30000 loan that it has secured against the farm? In an offset account linked to the farm it generally takes care of itself, but can the trust make interest free payments to the farm to clear the debt and are these tax deducatble? The idea would be to have the new venture unencumbered within a few years so we can use it as a tool for investing in IPs without tying it to the farm too heavily. Plus, if the trust is positive geared, I believe that's not a bad way to go??

    Any other options, comments or advice is welcome :)
    Thanks
    Rusty

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Hi Rusty

    When you say ‘the farm” what entity are you referring to?

    A trust can make loans to beneficiaries depending on the terms of the deed. It can also make payments of capital tax free to beneficiaries, but to do so it will need capital to make the payment with. If the trust is borrowing $30k to invest then you will probably be envisaging it making money and so it could distribute income to beneficiaries and then capital – from increased equity for example to pay the loan down. But if there are any capital gains then these will need to be distributed or the trustee will pay 48% in tax.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of rusty05rusty05
    Member
    @rusty05
    Join Date: 2011
    Post Count: 94

    Hi Terry,
    Sorry, I was rambling a bit, but you answered my query perfectly so I wont waste any more of your time. Thanks, you're a wealth of information!
    Rusty

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