Residential Property Investment – Benefits and Pitfalls of Purchasing Property in a Trust Structure

What are the main types of trusts?

A trust is a legal arrangement whereby one person (known as the “trustee“) holds assets on behalf of another person (known as the “beneficiary“). Trusts are commonly used for asset protection and tax planning and generally have their own special rules established by a written instrument (known as the “trust deed“).

There are two key types of trusts used commonly throughout Australia, being discretionary trusts (commonly referred to as family trusts) and unit trusts.

Discretionary trusts

Given their nature, discretionary trusts are typically used by a single-family group, as opposed to being utilised by multiple, unrelated parties involved in a property transaction.

Under a typical discretionary trust structure, the trustee (be it an individual or company) has the discretion where to distribute the income and capital of the trust amongst the nominated beneficiaries.

The beneficiaries generally won’t have the right to call on distributions of income or capital, they merely have the right to be considered. When these trusts are properly structured, there is a strong level of asset protection.

Unit trusts

Unit trusts are not as common as they once were, although they’re still used in certain circumstances. Unit trusts can be very useful when there’s unrelated parties involved in property transactions as each unit holder will own a fixed entitlement based on the number of units held.  This is not unlike with shares in a company.

Income and capital from the trust is distributed to unit holders in proportion to the number of units that they hold. Often unit trusts are used in conjunction with discretionary trusts, with the units being owned by discretionary trusts, allowing for even greater asset protection and flexibility.

What are the benefits of buying property through a trust?

  • Discretion to streaming investment profits and capital gains.
  • Greater opportunity for year-end tax planning measures
  • Ability to utilise corporate trustees to aid in protection from creditor claims
  • Safeguarding around transfer control of the trust should there be the passing of a trustee/director of corporate trustee
  • Ability to have multiple unrelated parties invest in a singular asset with fixed entitlements
  • In certain circumstances, trust losses can be utilised to offset additional trust income

What are the pitfalls when buying property through a trust?

  • Regular review of the trust deed can be detrimental to the future of the trust
  • Can be a costly and complex structure to establish and maintain.
  • The risk of failure to appropriately deal with loan accounts and unpaid entitlements
  • Trusts cannot distribute losses, rather they must carry these losses forward to offset against future years profits – negating benefits of negative gearing
  • Depending on state-based legislation, the trust may have a vesting date
  • Failure to properly plan and establish strong estate directives can lead to complex and expensive legal outcomes

There is no one size fits all approach when purchasing property in a trust structure, with each individual scenario having its own long-term vs short-term implications which may result in unexpected stamp duty, capital gains, unintended tax outcomes or legal consequences.

To find out more about the type of trust that will work best for you, contact Accru for support  

About the Author
Marcus Johnson , Accru Hobart
Marcus has been working with owners of small-to-medium sized businesses for the past 10 years and thoroughly enjoys playing an active role in helping to build client relationships whether it be through proactive tax planning measures or merely acting as a sounding board.
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