Family Trust Accounting & Tax

[battler]

Hi all,

I wonder if anyone can assist with a question about family trusts.

By way of background, recently a family member got into financial difficulty whereby they were behind on their mortgage, plus had ammased a personal loan and around $5,000 of other sundry debts.

The person had gone from an income in excess of 50k to an income less than 20k and was therefore having extreme difficulty managing the payments on all the debts.

Long story short, the solution I came up with, was to settle a family trust with myself as settlor and trustee and the family member as a beneficiary. Then through the trust, "purchase" their property with fresh mortgage finance, and repay the existing outstanding mortgage, personal loan and sudry debts.

The family member now pays via automatic payment into the trust account one weekly figure to cover mortgage, rates and insurance, which I then pay from the trust account to the bank, council and insurance co, to ensure they are paid on time.

We have a licence to occupy in place which specifies the person must consistently run a balanced budget, not take on new debt, must make the payments to the trust account and must keep the property in good order.

To add to the mix, the family member has now taken on two boarders in the spare bedrooms of the house to boost their personal cashflow.

Now, the question is - how is this trust placed for tax purposes? Does it need to register with IRD? Is the income classed and "rent" ?

2nd question, how is the family member placed tax wise regarding the two borders?

Any help appreciated, and my apologies if this sort of situation has been covered in a previous thread.

Many thanks.

[David_W]

Recommendation

Hi there

Sounds like you need to speak to a specialist. Try Matthew Gilligan or trusty (and trustworthy guru) sidekick Anthony Lipscombe of Gilligan Rowe, or Garth Melville of Company Solutions Limited.

Good luck with your proposed solution

[masteraccountants]

Hi Battler,

It's commendable that you've helped out!

As far as the family trust is concerned, it is not in the business of rental property investment. IRD would look upon the arrangement as a private arrangement, as it involves family members. So there are no tax consequences for the family trust.

The family member living in the property might have a tax issue. If the boarders are not family members or friends, then IRD would require the tenant to declare 20% of the board income that they receive.

This is tantamount to claiming 80% expenses, but with no need to keep receipts to evidence the claim.

The rules are 1 boarder = no need to declare, 2-5 boarders = declare 20% of the income, more than 5 boarders = keep comprehensive records to declare 100% of the income and claim the expenses.

I hope that makes it easy for you!