Tax Question. Loan from Discretionary Trust to Shift Bank Interest Income

Question for the taxation gurus in the smart OZB community.
Retired person.
With the higher interest rates this financial year, the interest income is gone much higher than expected triggering MLS (no private health care) for both (husband and wife).
In the past funds were invested in bank accounts under a discretionary trust, but now interest rates offered for trust accounts are much lower than individual accounts.
Concessional super contributions unfortunately don't lower income for MLS.
Would it be possible to say that bank accounts funds were a loan from the trust and invested in individual account (purpose higher rates).
Interest would be paid from the individual to the trust (same as earned from the bank) to generate a interest deduction D7 (lowers income for MLS) to effectively shift the interest income to the trust?

Comments

  • +14

    You will not pay the MLS if your income is less than the base income threshold, which is:

    $90,000 for singles
    $180,000 (plus $1,500 for each dependent child after the first one) for families

    Mate, if your income from interest alone, exceeds $180k…. pay your fair share of taxes and levies. You won't get the sympathy vote on Ozb.

    • +1

      $180k in interest…I wish…

  • We retired this financial year, so the majority is employment income.
    However there is about $20k in interest income from a lifetime of savings that pushes us over the couple $186k MLS threshold.
    We used to have that in bank accounts under a trust, but now the trust interest rates are so much lower than individual accounts rates.
    The unforecast extra was due to accrued leave that was taken before retiring (including extra leave loading). If not for that we would be under $186k couples MLS threshold.

    • Too late for the interest already earned, but that cash should be in super (unless you already have > $1.7M). Interest would have been taxed at only 15% until you retired (and 60+). Now it would be earning interest tax free, and you'd be taxing it as a pension tax free.
      If any chance you'll be paying tax in the future, might be still worth considering.

      • Yes, looking at SMSF, otherwise superannuation funds fees are too high.

        • I agree. Just decide how you would invest, and what it would cost in a SMSF vs paying a retail fund.

          Those with a vested interest say you need a mega fortune to cover the costs of a SMSF, but it isn't true. It costs me about $700pa. You don't need a lot in super for a fund to swallow $700 in fees.

    • Macquarie Cash Management Accelerator is paying 4.65% and can be setup by a trust.

      • Thank you. I looked at it, but considering that individual accounts are paying 5.4% to 5.5% it is a big difference.

  • +9

    Would it be possible to say that bank accounts funds were a loan from the trust and invested in individual account (purpose higher rates).

    That’s shifting from tax minimisation to fraud. The sensible move would be taking up PHI to avoid the MLS

    • +1

      taking up PHI to avoid the MLS

      top answer

    • Agree. Unfortunately a bit too late for 2023-24 fy.
      And it is only a one off. Unfortunately income will be nowhere near that in 2024-25 fy. I wish…

      • Probably a bit late in life to be considering PHI. The loading makes it ridiculously expensive, and not a viable option for avoiding MLS.

        Edit: Whoops, I need to read a few comments down and see if someone else already said same thing

    • +4

      Just saw your retirement update … pay your MLS this year, as a one-off cost of your miscalculation. And, as a retiree, you should seriously consider PHI for your future

      • +2

        if they are near retirement age and not paid for PHI yet there will be a world of pain with LHC loading to pay

    • +1

      Unfortunately not worth with LHC loading.

  • +1

    It is a $200 question with an accountant max. Rates have been high for like a year so you should have seen it coming.

    I do like when a trust arrangement goes wrong. Your accountant should have really been on top of it.

  • +1

    Why wait til 2 weeks before the end of financial year to sort this out? Surely you can foresee this situation months in advance

    • I would normally foresee. Lots going on this year with retirement and all the rest.

  • +4

    Having a tax debt is a good problem to have.

    • +1

      It could be a good solution to use up all those discounted iTunes cards.

  • +3

    Good way to spend your golden years with a fraud charge going through the courts

  • No. if it's in individual name then it will be in your assessable income. you can set up an arm's length commercial loan to lend money from trust entity to your personal entity with an interest charged to be deducted against your income but you will find it hard to justify why it's not just a tax avoidance exercise. tldr, it's not worth it - speak to your accountant re: other tax avoidance minimisation measures

    • Thank you for your comment.
      That's what I was thinking.
      Difficult otherwise to find a tax deduction for $20k at this stage.
      Complete oversight, as I could have easily put the cash in a 6 months term deposit maturing after 1st July! That way work income only, for me and my wife, would have been under threshold.
      Costly mustake, but I had a lot going on with retirement and other family issues.

  • +3

    Sounds very much like you're trying to do the dodgy switcheroo.

    Definitely looking at getting onto the ATO's radar with this one.

    Just pay your MLS and take out PHI, you're really running the gauntlet by not having it at your age.

    The gov forced healthy younger working class onto the PHI because of shitty lobbying, the least you could do is benefit from it.

  • +1

    Do you have a way to show a funds transfer from the trust to yourself early in the financial year? Large enough to justify the interest that you want to transfer to the trust income?
    If you do it may have legs. If not it is a big gamble.

  • -3

    Reply to all the PHI comments.
    Never had PHI as I always thought it was a government imposed scam. Not big earners so managed to stay under threshold. Until this year. With retirement an a lot of other distractions, I didn't forecast properly and count all variables.
    Too late for PHI now anyway, as LHC loading would make it prohibitive.
    The money I saved not having PHI is my self insurance. At least I would not have to fight some insurance when I need to call on it. We all know how insurance is. Quick and happy to take your money, but lots of hoops ro jump when they have to pay.
    I may have to pay MLS after all, but worth a try to see if avoidable. The goverment doesn't spend the money that well that you would want to five more than you have to. And we have already paid taxes for a lifetime anyway!

    • -1

      And we have already paid taxes for a lifetime anyway!

      Oh, well if you've already paid enough taxes for your lifetime then yeah, create a set of fund transfers to cause a lower tax position, then sign your tax returns (which are legal documents) and hand them in.

      If they try anything you can just be like "oh, we already paid enough and we don't agree with how you spend it", which are both good arguments.

    • Not sure about the downvotes. Does everyone think that PHI us such a good thing?

      • -1

        Oh we agree PHI is a scam under the guise of it being for the good of Australians.

        It's more when you're at the retirement age is when it becomes worthwhile for the first time in your life.

    • Don't know why you got negged, PHI insurance is very much a scam.. the fact that we give these companies extra in subsidies, extra money that could help improve the public system is how I know the Australian government doesnt work for Australian people.

      Anyways, back to your question. I would give the additional funds to a charity as a tax deductible donation. You wont pay the medicate levy surchage and you'll also help people in need.

      Good luck

      • Thanks dor the suggestion, but we are over the couple MLS threshold by about $20k. The MLS is 1% so about $2k.
        Not going to donate $20k to a charity to save $2k in taxes… Rather donate to the government 🤣

      • the fact that we give these companies extra in subsidies, extra money that could help improve the public system is how I know the Australian government doesnt work for Australian people.

        They gotta give some money to their mates running the PHI!

    • +1

      Yes the current state of PHI means it’s junk insurance. I would rather self insure too if we were not taxed into compliance

  • to Shift Bank Interest Income

    Your 'f' key on you keyboard appears stuck…

    (Note: This is not financial advice…)

    • 🤣
      Bank interest used to be "shit"
      Now is a bit better at about 5%.
      There lies the good problem

  • +1

    How did the money get from the trust to you in the first place? And if you shift money back into the trust (assuming you can), doesnt the income need to be distributed anyway - are there other beneficiaries?

    As an aside, Defence bank offer some reasonable TD rates for companies/trusts

    • Thank you.
      We fot the money out of the trust when Rabo rates for trusts took a dive. They used to be the same as individual's rates. Now for trusts they give you 1%!!!
      Will look at Defence Bank. But do you need to be part of the ADF?

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