Property investment, trusts & tax structure
There are several ways to invest in property and each has different tax structures.
Previously I’ve talked about the tax benefits of investing in property as an individual or as part of a partnership.
Read more: Property investment, tax structure & you
Now I want to look at the benefits of holding properties through a discretionary trust structure.
What are the advantages?
The major advantage of using a discretionary trust to hold your properties is that you are able to decide who benefits from the income of the trust.
This means that when your investment becomes positively geared, the trust can distribute its income in the most tax-effective way allowed by the trust deed – typically to the beneficiaries with the lowest marginal tax rates.
Read more: How negative gearing works
In addition, any capital gains incurred by the trust can be streamed to the beneficiaries who, for example, have capital losses.
You are able to decide who benefits from the income of the trust.
The trust can also stream gains to those entities who are able to use the 50% discount (typically individuals) rather than those who can’t (companies, for instance).
There are also asset protection advantages in holding assets through a discretionary trust.
Because the beneficiaries of the trust are not the legal owners of the asset, creditors cannot easily access the asset if a particular beneficiary encounters financial problems.
This contrasts with other ownership structures such as companies (or owning the asset as an individual), where creditors have easy access to the assets they hold.
What are the disadvantages?
The downside of investing through a trust is that tax losses will be trapped in the trust as the trust cannot distribute losses to beneficiaries.
This will usually mean – subject to some complex anti-avoidance rules – that losses can only be rolled up and used against future income within the trust.
If your properties are negatively geared, this will be a major disadvantage.
The information in this article is for general interest and is not intended as advice. For advice and planning, consult an experienced tax professional