Can a trust borrow to pay a company's tax debt?

Accountants set up family groups this way on purpose: the risky trading activity in a company, the valuable property in a separate trust. It protects the asset from trading creditors. It also means that when the company needs to raise money against the property, two entities are involved.

Two ways to structure it

1. The company borrows, the trust guarantees. The company is the borrower. The trustee gives a guarantee and charges the trust’s property to support it. The ATO is paid from the company’s loan. The interest is an expense of the company, which is where the tax debt arose.

2. The trust borrows and on-lends. The trustee is the borrower, secured by its own property. It lends the funds to the company under a written loan agreement, and the company pays the ATO. The trust pays interest to the lender and charges interest to the company.

Lenders can work with either. The choice is mainly a tax and asset protection question for the accountant.

What the deed must allow

For the first structure, a power to give guarantees and to charge trust property for the debts of another. Many older deeds do not include it, or limit it. For the second, a power to borrow, to charge trust property, and to lend. The lender’s solicitor will check, and a deed variation may be needed, which takes time. See can a trust borrow against property it owns.

The benefit question

A trustee must act for the benefit of the beneficiaries. Guaranteeing a related company’s debt can be challenged if the trust gets nothing from it. The benefit is usually real and should be recorded in a trustee resolution: the company pays rent to the trust, the beneficiaries are the same family that owns the company, and the company’s failure would harm the trust’s tenant and the family’s income.

Tax points to raise with the accountant

• Deductibility of interest depends on the use of the funds and who bears the cost.
• An on-loan should be documented, with interest, to support the trust’s deduction.
• Unpaid present entitlements and related-party loans in the group can interact with Division 7A and related rules.
• Director penalty notice exposure sits with the company’s directors personally, and only full payment by the company, or another permitted step within 21 days, deals with it.

The practical steps

Send the group structure, the trust deed with all variations, the ATO balances and the title. With those, a lender can say quickly which structure works. More on the company side is in do directors give personal guarantees. General information only, not legal or tax advice.