Before you decide on setting up a trust for an investment property you must understand the ‘golden rule’ about trusts which is this, that when it comes to Trusts – not “one size fits all”.
It is important that you seek professional advice from accountants that are property tax specialists that looks at your personal situation before deciding on what structure you hold your property assets in. If you get it wrong it could cost you potentially tens of thousands of dollars. (RELATED: To Trust or Not to Trust?).
What to consider before setting up trusts or ownership structure:
- Income tax – Both short term whilst the property is negatively geared and long term if eventually the property generates a positive income.
- Capital Gains tax – What name should the property be held in, in the event that this property is sold and a capital gain is realised at a future date.
- Land tax – Each state has different land tax thresholds and rules, for example Queensland gives a trust a separate land tax threshold. Whereas NSW does not and other states are also different. You need to do a cost vs. benefit analysis on the land tax costs of holding inside a trust vs. outside in a particular state.
- Estate Planning – What structure will enable me to pass property through to future generations with minimal cost and taxes.
- Asset Protection – Are you in a litigious industry or have a likelihood at some point to be exposed ?. How best to protect your assets from potential litigation now and in the future.
A property is held in a trust on behalf of the beneficiaries or unit holders, the trustee of the trust is the legal owner i.e. it’s the name on the title deeds, however the beneficial owner are the beneficiaries in the deed or unit holders that hold the units entitlements.
Most common types of Trusts:
- Discretionary or family trust. These trusts are a very common form of trust however, we do not recommend these for negatively geared property. The losses can be quarantined inside the trust, which then means you cannot obtain the tax benefits of negatively geared property. This then impacts on your cash flow.
- Hybrid Trust. These trusts are a combination of discretionary trusts and unit trusts and generally the investor borrows money to acquire units in the trust These units have entitlements to receive Income and Capital. This enables the investor to claim interest deductions in their own name as long as there is a commercial intent and the amount of deductions would be proportional to the income and capital they are entitled to.
- Unit Trust. These trusts are more common with property developers than long term investors and once again the investor invests in this trust and receives a fixed entitlement to the trusts income and capital.
- Property Investors Trust. The Property Investor Trust deed® is specifically designed for long term property investors. It has a number of other benefits other than those related to tax which provide the flexibility that a long term property investor is looking for such as ; the trust has no vesting date i.e. trust does not stop after 80 years, there is a family lineage clause which offers protection of the assets to the next of kin (blood relatives only) in case of a bankruptcy or family court dispute and allows for the trust to hold multiple assets controlled by various different family members. In relation to tax, The Property Investors Trust deed® allows you to claim the negative gearing against your wages unlike many of the other Trusts as long as you follow the rules set down in the Product Ruling by the ATO.
Overlaying all this is land tax. In NSW none of the above trusts receives the land tax threshold. A special Fixed Trust is required to receive the threshold which is similar to a unit trust, but does not give asset protection.
You will need to review the land tax implications on a state by state basis where the property resides. Your final decision on a trust would take this into account. For some clients who are primarily concerned with the cost of land tax it may be more effective to purchase in their own name as this cost is more critical to asset protection and estate planning. Later on when equity builds in the property you can protect your wealth by using an Equity Bank Trust.
Setting a trust up is quite a simple process:
- You will need a trustee which could be an individual or company (we generally recommend a corporate trustee).
- A trust deed which is basically a document setting out the rules of the trust and can be purchased from a number of suppliers for varying costs. Be mindful there are well drafted deeds and poorly drafted deeds.
- A settlor which is someone to settle and witness that the trust is established.
- An appointor, which is the person/people who basically decide who the trustees should be . Please note this is a very powerful position and one that the appointment should be well considered
As mentioned before we would strongly recommend that you seek independent advice with an accountant that has experience in the area of trusts and property investment before making a decision on the appropriate structure and the reasons.
Please contact us to organise an appointment to discuss what structure would best suit you.
If you intend to rely on any of the information in this document to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor, its officers, employees, directors or agents.