How lenders assess income from a trust

The trust's financial statements show its income, usually rent or business profit, less expenses. Lenders add back interest on loans being refinanced, depreciation and non-recurring items, and treat the result as income available for the loan. This works well for a trading trust with a profitable business or an investment trust with rent, and it means the trust can service a loan on its own income even if the individuals behind it earn little.

Where the trust distributes its income to beneficiaries, the lender can count those distributions as the guarantors' income, evidenced by their personal returns, provided the distributions have been consistent for two years and the trust can sustain them. Lenders are wary of distributions that swing wildly, and of distributions to beneficiaries who are not guaranteeing the loan, because that income is not available to the lender.

A lender cannot count the trust's net income and the distributions of that same income to the guarantors. Specialists present the income once, in whichever form the lender's policy accepts, and make sure the guarantor set matches the income being used. A common problem is a trust that distributes to a spouse or adult child who is not on the application, which removes that income from the assessment.

For an investment trust the rent is the trust's income and is assessed like any rental income, at 75 to 90 per cent of gross, against the trust's loan repayments and expenses. Negative gearing losses inside a trust do not flow to the individuals and cannot offset their salary, which some lenders reflect in the assessment and all accountants will point out before you choose the structure.