Tuesday, May 22, 2018

Deductible debt, trust cloning and 328-G rollovers

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/S8gy1ZMhIzA

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

One factual scenario we have explored utilising the 328-G rollover concessions involves where there is an original trust and a cloned trust and the transfer of assets between the two trusts will satisfy all of the rules that need to satisfied.

If having setup the new trust, it goes to the bank to borrow money, it is necessary to analyse what that money is being used for to determine if any interest expense is deductible.

If the debt is to fund the acquisition of the business from the original trust, that is, the original trust is selling the business to the cloned trust, then the nature or the purpose of the borrowings is going to be income generating.

That is, the debt expense will be deductible.

The cash flow will be funds coming from a third party bank into the cloned trust, and then as part of the sale transaction, the payment is made to the original trust.

The cash received by the original trust will because of the 328-G provisions, be a tax free receipt.

At that point, the original trust can essentially make a form of ‘eligible termination payment’ to the ultimate controllers of the original trust.