Should I or should I not be using a trust structure to hold my investment property?

Family or discretionary trusts have long been used by business owners to shield assets from litigation and to utilise members of a family group on lower marginal tax rates. However, one question that seems to be becoming more prevalent from all clients is, when looking at structuring a property portfolio, with a long term view in mind, should we be buying through a trust?

To help make that decision, we always like to list the advantages and disadvantages of any structure before deciding which structure to choose. This is to ensure there is complete understanding of any future implications.

First we will look at who can be a party to a trust:

Settlor
Generally an unrelated individual, a settlor is the person who “settles” the trust, by providing a settled sum to the trustee. Usually around $10 is deemed sufficient for the trust to be created.

Trustee
The person or entity responsible for the growth and care of the trust.

Beneficiaries
Beneficiaries receive taxable distributions from the trust and ensure the trustee is doing their job.

Appointor
An appointor has the power to change the trustee if it chooses (usually an accountant/lawyer that establishes the trust).

Advantages:
Asset protection
With increased marketing of “no win, no fee” solicitors, people are becoming more and more inclined to seek legal representation if issues arise. Under a family trust with a corporate trustee, properties are held by the trust, so are shielded from creditors, bankruptcy and divorce.

Tax minimisation
Unlike owning a property in an individual name, a discretionary trust gives the trustee, by way of resolution, the flexibility each year to allocate net income to a family member on a lower marginal tax rate. This also applies to the distribution of capital gains tax. For example, if a property was purchased through a trust and held through the family life cycle until a child reaches 18, the property could be sold and the capital gain distributed to the child, greatly reducing any tax liability if both parents are working.

Estate/succession planning
A family trust with a corporate trustee allows a seamless transfer of wealth to future generations by allocating the shares and nominating the directorship of the corporate trustee, in accordance with your will.

Capital gains tax discount
Unlike a company, a family trust still receives the 50% capital gains tax discount if an asset is held longer than 12 months. For example, if a property increases in value by $100,000 and is sold after 12 months, ignoring other costs, $50,000 in capital gains income would be distributed to beneficiaries as opposed to $100,000.

Disadvantages:
High establishment costs, increased ongoing costs and compliance
The establishment costs are around $1,800, including stamp duty, trust deed, corporate trustee and company constitution. There will also be an ongoing ASIC annual review fee of around $250 per year, an annual set of Financial Statements and a tax return will need to be completed for the trust. This starts at around $550 and can increase depending on the complexity of the transactions running through the trust.  A cost/benefit analysis should be conducted prior to the creation of the structure.

Lower land tax thresholds
If you are looking to buy property, the land tax thresholds are significantly lower.  For example, NSW has a nil threshold for family trusts, meaning you pay  land tax on the first dollar value of the unimproved land, at 1.6%.  QLD is slightly different, with the threshold being reduced from $600,000 for an individual to $350,000 for a trust. 

Land tax would need to be taken into consideration on a property by property basis, to determine the best ownership structure.

Losses are quarantined in the trust until such time as there is a profit. Unlike getting a tax break for negative gearing in your own name, losses cannot be distributed out of the trust. 

Losses can reduce future net income and capital gains however, so are not lost when incurred

Distributions do affect government benefits - this needs to be kept in mind when deciding on beneficiaries that receive net income.

The establishment of a trust to purchase property should not be undertaken without first seeking advice from your accountant and solicitor, to determine if the structure will be right for your overall wealth creation strategy and how it will affect your estate plan upon your passing.

Josh Liddy
Chartered Accountant
joshua@pliddyandassociates.com.au
P. Liddy & Associates

Please contact us for more information:
P. Liddy & Asscociates
Suite 6, Level 2, 64 Croydon Street, Cronulla NSW 2230
P.O. Box 505, Cronulla NSW 2230
Tel: (02) 9544 0722 Fax: (02) 9544 0922
pliddyandassociates.com.au

General Advice Warning
The article is provided for general information only and the author and P. Liddy and Associates are not engaged to render professional advice or services through this article. The author and P. Liddy and Associates expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.