Negative gearing and trust structures

Trusts cannot distribute losses, only profits.

With unit trusts it is possible to borrow to buy the units. If these units are income producing, or likely to produce income, then it may be possible to borrow to buy these units and claim the interest on the loan.

Discretionary trusts do not have any units, with the beneficiaries only receiving a distribution if the trustee decides to give them a distribution. Because there are no units or shares involved and no certainty of receiving an income the beneficiary cannot buy into or own part of the trust like they could with a unit trust or a company.

Joseph,

I had a Hybrid Trust set up and was about to settle two properties into it when I discovered that there was a high risk that the interest on the loan may not be deductible.  Some advisers still say it is okay but  I decided not to use it after searching the ATO private rulings which clearly didn't allow deductions.  With respect to UT's the ATO told me that they will allow interest to be deductable to me provided the loan is in my name and I have the units in the trust.   I was pretty disappointed with my accountant setting up a hybrid trust with this risk and and they are still saying that others are doing it now.  The clearest advise I got was directly from the ATO you should call them and ask your question as they are quite happy to answer you directly.  They also said that I could apply for a personal ruling on a Hybrid Trust if I wanted to but I decided against it in the end.  Someone else told me that you can buy a trust that has a generic ruling but the ATO said that the ruling must be specific to you.

You find a lender that is offay with this set kind of finance,set up the trust, find the hosue, get a loan to buy units in the trust, the trust aquires the property and the trust offers the property up as security all at the same time.

A trust is a relationship really. Discretionary trusts are set up with a trustee, who is the legal owner, owning property for the benefit of the beneficiaries, who are the beneficial owners.

Just think of Dad starting a bank account for his little kid. The kid is too young to sign, so the dad has the account in his name. He is the trustee, but the kid is the beneficiary = the real owner.

It is a bit different with a unit trust as the trust is made up of unit holders, like shareholders of a company – each owns a percentage of the trust.

Discretionary trusts are different as the beneficiaries are a potentially very large group, none of whom are absolutely entitled to anything. They only receive income etc at the trustee's discretion (which can vary from year to year).