Property ownership is not just limited to happy young couples, despite this being the common portrayal. There are all kinds of ways to purchase and own property – including as part of a trust.
The investment method holds many potential tax breaks and financial benefits, and almost anyone can form a trust – although it should be noted that properties bought through a trust can be harder to finance. A little bit more complicated than the standard home loan, finding a lender willing to approve this loan type can be trickier, with only a handful of lenders willing to take it on.
But if you can find the finance, trusts certainly have their perks. Join us as we explain everything you need to know.
According to the Australian Taxation Office (ATO), a trust can be defined as “an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries”.
In their description, the ATO mention that while in legal terms, a trust is a relationship (rather than a legal entity) they are treated as entities for tax purposes – which, coincidentally, is where some of their benefits come in, with many using a trust for tax saving purposes.
Although the structure can differ depending on the type of trust, in basic terms a trust is controlled by the trustee, but it is the beneficiaries (members of the trust) who own the asset/s and benefit from the trust.
Asset protection: a trust can offer a certain layer of protection if sued or in the case of bank bankruptcy since the property is owned by the trust, not the individual. For this reason, certain professionals (such as surgeons) might benefit from buying through a trust.
Estate planning: A trust can provide a simple way to hand-down properties to children or grandchildren without the need for capital gains tax or stamp duty.
Tax advantages: The trustee can split the trust’s income between beneficiaries of the trust in the most tax-effective way each year.
Lending can be lower: Often lenders will only let you borrow up to 80% in a trust, whereas they might allow up to 90% during an ordinary investment. It can also be harder to find a lender willing to approve the loan.
No negative gearing for investments: If your investment loses money you won’t be able to claim this against negative gearing like you would for an investment in your personal name.
Tax costs if moving property you already own into a trust: If moving a property you already own into a trust (rather than buying a new property through the trust), you are effectively selling it to the trust, meaning you could be liable for capital gains tax and stamp duty.
How do they work?
Most commonly set-up by a lawyer or accountant, a trust usually has the following components:
Trustee: The trustee is the legal owner of the trust and can be a person or company. The trustee is in control of the trust’s decisions such as the distribution of income and capital.
Beneficiaries: the beneficiaries are the members of the trust who receive the benefits of the asset.
Appointor: The appointor is the person responsible for appointing, removing or replacing the trustee.
Settlor: The settlor is the establisher of the trust. This is usually a lawyer or accountant.
Trust deed: This is a document that sets out the rules of the trust and the names of all parties involved.
Despite all those involved, it is the beneficiaries who stand to benefit from the property investment, though the property would be bought under the name of the trust (not the beneficiaries).
While going through your set-up or research, you might come up against the following words and phrases (in addition to the components listed above):
As trustee for (ATF): A legal term attributing that the trustee is operating in their capacity as ‘trustee for’ a particular entity. E.g. Joan Smith as trustee for the Smith Family Trust.
Corporate trustee: This is when the trustee is not an individual but a company.
Individual trustee: When the trustee is an individual person.
Held in trust: the assets that are owned by the trust.
Stamp duty: A fee paid to your state government when your trust is opened.
Unit: Similar to the idea of shares in the share market, units are used in ‘unit trusts’ as a way to divide the assets between beneficiaries.
There are many types of trusts that are used by property investors, but they generally fall into one of the below categories:
Most common type of trust for investors.
Used to hold assets.
Beneficiaries do not have a fixed entitlement to income or capital of the trust. Instead, this is distributed at the trustee’s discretion – allowing the possibility for tax benefits through distributing income to those in lower tax brackets.
When all beneficiaries are related, this type might instead be known as a family discretionary trust.
Trustee splits assets into units (think of them like shares) and divvies them out to beneficiaries in varying amounts.
Income split between beneficiaries based on the number of units owned.
Like with shares in a company, beneficiaries’ gain is dependent on the number of units owned.
Combination of a discretionary trust and unit trust.
Beneficiaries hold units in the trust (such as in a unit trust), but the trustee also has the ability to distribute income as they wish (such as in a discretionary trust).
Besides the potential downsides of a trust outlined earlier, such as the inability to negative gear and the potential difficulty in finding finance approval, there are a few more points to be cautious of before deciding to set up a trust.
Firstly, it is important to consider the managerial and administration aspects of the trust. For example, are the beneficiaries clearly outlined? Is there a succession plan in place for the appointer/principal role (i.e. the person who chooses and/or can replace the trustee)? Is the trustee making the appropriate distributions and getting paperwork in on time to avoid higher taxes?
It is important to also consider the possibility of future legislation change regarding the way trusts are treated for taxation purposes (although nothing is currently in motion).
The purpose of the Website is to provide you with an information service. If you think you may need investment or financial advice, we suggest you approach a licensed investment adviser. You are also advised to consult with a financial representative prior to the execution of credit documentation with any financial institution. Nothing in our Website should be taken by you to be the giving of investment advice.
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