John’s father, Ken has a trust, the Barbie Family Trust, which owns several residential properties in...

John’s father, Ken has a trust, the Barbie Family Trust, which owns several residential properties in Auckland. All the properties were bought in 2012. Ken is the settlor and trustee of the Barbie Family Trust and John and his sister are the beneficiaries of the trust. The trust is a complying trust and was set up 10 years ago. John and his friend Doreen own Milo Ltd (and only Doreen is an employee) with John holding 60% and Doreen 40%. Milo Ltd recently loaned $100,000 interest free to Barbie Family Trust.

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1.What is the tax implication of the interest free loan from Milo Ltd to Barbie Family Trust?

2.Is Milo Ltd associated with Barbie Family Trust for land transaction purposes?

Expert Solution

1. What is the tax implication of the interest-free loan from Milo Ltd to Barbie Family Trust?

Interest-free loan to Barbie Family Trust is taxable since John is a connected party of the trust has the majority of shares in Milo Ltd. Loan given by the associated person is taxable according to the new income tax Act of 2007.

2. Is Milo Ltd associated with Barbie Family Trust for land transaction purposes?

Milo Ltd can't associate with Barbie family trust for the land transactions since John is the majority shareholder of Milo Ltd and an associated person of Barbie Family Trust. A settler can associate with a trust and company for the land transactions. In this case, a settler is a person/company who is a related party of the trust by providing a loan to trust for a market rate of interest. Milo Ltd gave an interest-free loan to Barbie Family Trust, hence Milo Ltd is not a settler and can't associate for the land.

ekkarill92 answered 2 years ago

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