Q. What are the tax implications if I take a non interest loan from my family trust and then over several years have the family trust write off the loan?

A. If a loan from a trust to a beneficiary is not repaid, there are two tax consequences:

If the loan is interest free or a Private Loan from the family trust to a beneficiary – The ATO may treat the loan as an unfranked dividend to the beneficiary because it has not been established on commercial terms.  i.e it is an interest free loan (lower than the benchmark interest rate set by ATO) and it will be treated as a benefit for the beneficiary so Div 7A loan provisions apply requiring interest to be paid to the trust.

If the trust was to write off or forgive a beneficiary loan, any debt forgiven will be assessable by the borrower as income and will not be deductible for the lender (i.e. Trust) because the loan is issued for private purpose.

 

Follow Andrew on Twitter @AndrewHeavenFP.  This article was originally published in The Australian.