Holding investments in a family trust changes who can claim the interest. If the person who borrows is not the one who earns the income, the deduction can be lost.
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Some households hold investments in a family trust or a company rather than in their own names. Debt recycling can sit alongside those structures, but the interest deduction depends on who borrows and who earns the income.
The core strategy does not change. Our guide to how debt recycling works sets out the steps: pay down the home loan, borrow the same amount back in a separate split, and invest it.
The Australian Taxation Office (ATO) allows a deduction for interest on money borrowed to buy shares, provided it is reasonable to expect assessable dividends. In a trust or company setup, the question is whose dividends they are.
Here is the pattern that causes problems. You borrow against your home in your own name, the money goes to the family trust, and the trust buys the investments. You pay the interest, but the trust earns the income.
The ATO sets out its view in Taxation Determination TD 2018/9. A beneficiary who borrows and lends the money interest-free to the trustee of a discretionary trust is usually not entitled to a deduction for the interest.
The reason is the link to income. Until a beneficiary becomes presently entitled to trust income, which ordinarily happens at the end of the income year, they have no more than a right to be considered by the trustee. Future distributions are too remote to support a deduction this year.
Lending to a trust at interest, under a written agreement, raises different issues and is a complex area. That design work belongs with your accountant before any money moves.
Kingfisher Finance Group arranges lending only. We do not set up trusts or companies, and we do not give tax advice. Your accountant or registered tax agent decides the structure, and we build the loans to match it.
At a high level, each option changes who borrows, who is taxed on the income and what it takes to run.
| Personal Names | Family Trust | Company | |
|---|---|---|---|
| Who borrows to invest | You, or you and your partner | The trustee, for the trust | The company |
| Who is taxed on the income | The owner of the investments | Beneficiaries presently entitled, or the trustee if none | The company |
| Yearly admin | Your own tax return | A trust tax return under its own tax file number (TFN) | A company tax return and company records |
A loss made by a trust cannot be distributed to beneficiaries. The ATO says it stays in the trust and can be carried forward against future trust income.
For companies, Division 7A can treat a private company’s loan, payment or written-off debt to a shareholder or associate as an unfranked dividend, unless it is repaid or put on a complying loan by the company’s lodgment day. Plan with your accountant how company money reaches your home loan.
Holding investments in personal names keeps the borrower and investor the same. For couples, our article on whose name the investments are in covers that choice.
If a trust or company borrows in its own name, the lender assesses that entity as the borrower. Ask these questions before you settle on a structure:
If you run a business through a trust or company, our page on debt recycling for business owners explains how we line the lending up with each entity.
The order matters because a deduction can be lost at the first transfer. Once borrowed money has gone to the wrong entity, or been mixed with private funds, it is hard to undo.
Decides which entity borrows, which entity owns the investments, and whether any loan between them needs a written agreement.
Recommends what to invest in and how much to borrow, based on your goals and risk tolerance.
Puts the loan in the right name, sets up separate splits and confirms how funds will move.
Borrowed money goes straight from the investment split to the investing entity’s account.
Every extra entity adds paperwork and cost. Weigh these against the benefit before you commit:
Trust and company tax rules also change from time to time, so ask your accountant for the current position before setting anything up.
A deduction is worth more at a higher marginal tax rate, which is why our page on debt recycling for high-income earners looks at whose rate applies.
Debt recycling and a family trust can work together, but only when the entity that borrows lines up with the entity that earns the income. Borrowing personally and lending interest-free to a discretionary trust usually costs you the deduction. Have your accountant design the structure first, then have the lending built to match it before any money moves.
Once your accountant has set the structure, we arrange the loans in the right names with a separate split for each purpose.
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Written and updated byAlex GeeDirector & Mortgage Broker, Kingfisher Finance Group
Reviewed byJessica MaraisMortgage & Finance Broker, Kingfisher Finance GroupA trust can borrow in its own name to invest if a lender accepts it as the borrower. Recycling your personal home loan into investments held by the trust is harder, because the borrower and the investor are different.
You can, but the ATO says interest on money lent interest-free to a discretionary trust is usually not deductible to you. Lending at interest raises different issues, so speak to your accountant first.
Neither suits every case. They differ in how income is taxed, how money reaches you and what they cost to run, which your accountant can compare for your situation.
No. The ATO says a loss made by a trust cannot be distributed to beneficiaries. It stays in the trust and can be carried forward against future trust income.
No. We arrange the lending and work alongside your accountant, who sets up and advises on the structure.
It depends on your accountant and how complex the trust is. Expect a trust tax return each year and accounting for distributions.
Debt recycling for self-employed Australians and business owners: variable income, trust and company structures, set up for deductible investment debt.
Read more → GUIDEHow joint, sole and split ownership change the deduction, the income and capital gains tax when couples debt recycle in Australia. Guide by a licensed broker.
Read more → GUIDELearn when investment-loan interest may be deductible under ATO principles, including the purpose test, tracing and common setup errors.
Read more →
1. Arranged a loan when our small business situation made it difficult to qualify.
2. Met requirements to have funding available by a specified date.
3. Understood my needs to setup debt recycling to allow tax structuring.
4. Communicated well throughout.
I would use their services again.
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Jess from Kingfisher was outstanding. I couldn't fault her communication, expertise or dedication to finding the best loan for our situation. The entire process was seamless from start to finish. We'll definitely be using Kingfisher again in the future. A top-tier organisation.
