Beneficiary Lessor deriving rent from Trust property - is the lease deemed income?

[Bean]

If I transfer my house to a family trust, and the Trust leases the house back to me rent free, and I then rent out the house will the Ird determine an adequate rent and deem that as income to me, the lessor? Then I would be paying tax on both the Deemed rent and the actual rent I receive. It might not be worth it.

[Rosco]

Why wouldn't the Trust just rent out the house?

Ross

[Bean]

It could. Even if it does the Trust will be on a 33% tax rate, won't it? Whereas I am on the lowest tax rate, so in my circumstance as I am intending to rent out the house, from the point of view of tax, I would be better off to retain the ownership of the house and not transfer it to a Family Trust, wouldn't I?

[Perry]

Asset protection is a valid reason for using a Trust.
Any transfer to a Trust for tax-benefit purposes
is illegal. Don't go there!

However, if, as a consequence of prudently using
a Trust for asset protection or estate planning pur-
poses, some tax benefit accrues, that is purely
adventitious, rather than tax avoidance.

In that case, intention & structure go hand-in-hand.

Yes, trustee income is at a higher rate. However, in
practice, most Trusts will make a distribution to any
beneficiaries who may well have lower tax rates.
Such distributions are taxable income for the said
beneficiaries.

[Bean]

Thank you Perry. I wasn't thinking of tax-benefit in transferring the house, I was thinking it would be a bigger tax loss to transfer it to a Trust than if I retained the house myself as I am on a lower tax rate. However it seems that the Trust can make a distribution to me, so then the Trust would not be paying tax, would it? My intention is to live in part of the house and rent out the rest. Inland Revenue has previously accepted that was rent and not board and allowed me deductions for maintenance and repair. My intention is to do that again, and I am concerned about any tax pitfalls in doing that if I transfer the house to a Family Trust.

[Wayne]

starting to sound more dodgy! Am I hearing this correct
- you currently own the house
- and live in it
- and want to transfer this to a trust
- and live in it with others
- and have now much deduction? Would you 'rent' from the trust and claim 100% of expenses?

What are you trying to achieve? Asset protection? Tax minimisation?

[Bean]

What's dodgy? I am allowed to live in my house. I am allowed to live in it with others. I am allowed to transfer the house to a Family Trust. I am required to declare rent received. I did not say 100% deduction, you did. Previously I apportioned what was used personally and what was rented out. That was accepted by the IRD. The deduction claimed, if any, would be minimal anyway because as I said I am on a low tax rate. I am on a low tax rate because I am on a low income, and so if there was any deduction there would not be much income to offset it against anyway.
There is already a Trust set up. I agreed to set it up as I was told it was a good idea. It was set up with the purpose of transferring my house to it but I have always been reluctant as I don't know all the implications. I am being encouraged to transfer my house to it for asset protection, but I have reservations about doing this, and I am concerned about how it will affect what I intend to do. I bought the house with the purpose of renting it and living in it. In fact that was what the previous owner also did. I did that and stopped for personal not financial reasons. My intention has always been to continue to do that. There is nothing dodgy about that. There could be an issue of whether to rent or have boarders. There is a lower tax rate for boarders but you cannot claim deductions. I don't want to do that. It does not suit me at all. I prefer the independence of renting part of the house.
I was concerned that the lease could be deemed income if I transferred the house, leased it and then rented it out but Rosco pointed out that the Trust could be paid the rent, not me, so that is ok. Then I was concerned that the Trust would pay tax at 33%, whereas I am on a lower rate. However apparently the Trust can distribute the income to beneficiaries, and they pay the Tax on the rate they are on, so I would not end up paying more tax.
Overall, it seems too complex and so I am still reluctant to transfer my house to the Trust.
The question comes up for me, because my Trust inherited from another Trust, (from Trust A) and some of the inheritance paid into my Trust (Trust B) which is allowed by the way, not dodgy! The object was so that Trust B could buy my house. It is set up so that when I want money I borrow it from Trust B. That would be ok if I was going to go ahead with transferring the house as the transfer of the house would pay the debt. Now that I am reluctant to transfer the house at this stage it seems to me I should get the money out as a capital distribution, not get more into debt to Trust B. That part might seem dodgy but really it has just got complex because I agreed to set up a Trust - Trust B- on the basis I would transfer my house and then I haven't done it. I am not compelled to. It would have been fairly simple had I just transferred the house to the Trust, but I am not sure that a Trust is a good idea for my situation.