Trusts are not necessarily the best vehicle to purchase investment property but compared to nearly all other ownership options, Trusts have the most benefits. But and this is a big but, this statement varies from person to person and deal to deal.
Introductions to Trusts
There is a misconception that a Trust is a separate legal entity. It’s not. Trusts are merely a longstanding legal construct.
Trusts are creating by settling an asset in trust for a beneficiary. That being the case you only really need 3 things for a trust to exist.
1. A settlor (the person with the asset)
2. The trustee
3. The beneficiary
What Types of Trust Are There?
There are quite a few different types off trusts which are listed here but only a couple which are used for tax accounting purposes:
- Discretionary
- Unit
- Hybrid
- Testamentary (created by a will)
- Bare
- Implied
- Charitable
- Sub-trusts
- Managed investment
Accountants will generally use discretionary or unit trusts.
Why Trusts are Good for Tax?
Interestingly, Trusts are not actually defined under the the Income Tax Act (ITAA). Despite that, Trusts are issued with a Tax File Number (TFN) and or ABN, and are required to file a tax return. Actually it’s the trustee that holds the asset but streams the income to the beneficiary/s and there are quite a few accounting and legal requirements to adhere to each financial year.
The crux though is that discretionary trusts at least allow the income of the trust to be streamed to where it’s best from a tax point of view. Rider Accountants will help you with the planning to minimise tax.
Pros of Trusts for Investment Property
Here are some reasons why you might choose a trust for structuring the ownership of your investment property:
- A corporate trustee will separate ownership
- Profits from rental can be distributed to where the least tax is payable
- Properties quarantined in trusts can improve borrowing capacity
- Good for families or family groups
Cons of Trusts for Investment Property
What would be some reasons why you might not buy an investment property in a trust structure:
- You lose the land tax free threshold in NSW
- The land tax free threshold is lower in the state where you are buying the investment property
- You are a foreign person
- The annual compliance and accounting costs of trusts are too high
- The investment property is negatively geared or otherwise losing money
What Must I do Each Year if my Investment Property is held in Trust?
Trusts are high maintenance and you need to factor this into your investment property journey
- Trustee resolution distributing the income by 30 June each year
- Trust Accounts
- Corporate Trustee accounts if applicable
You will need a good accounting firm like Rider Accountants & Advisors specialising in investment property clients.
Disclaimer: Any advice on this page is general in nature and does not take into account your individual circumstances. Book me online to have a tailored one on one consultation.