Property Investing structures

Look at discretionary trusts. These offer the most flexible way to distribute profit and save tax and also offer asset protection aspects.

Terryw
Discover Home Loans
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Hi Jono,

When purchasing your investment property, the decision as to which type of entity is best for you is one not to be taken lightly.

To select the best structure, consult your Solicitor and your Accountant. This should be done before signing the Contract of Sale or any other legal document. They will consider all the main issues that are relevant to you and your individual circumstances – including other personal factors.

Trust ownership is probably the most flexible way to own an investment property. The most common Trusts are:

Discretionary Trust
A discretionary trust is often referred to as a “Family Trust”. It provides flexibility in sharing income within a family and can operate for up to 80 years.

Income is distributed according to the trustees’ discretion, by allowing the income to be distributed to lower tax earners and relatives, including children (conditions apply).

Some advantages are low establishment costs and asset protection, as only the trustees can be sued. Disadvantages include the fact that if there are losses, these will be quarantined within the trust and cannot be distributed to beneficiaries. Therefore a discretionary trust may not be suitable for investors who practice negative gearing – unless the trust receives income from other sources. Also, land tax thresholds are lower than for individuals.

Unit Trust
In a unit trust, the trustee holds assets on trust for the unit holders. A unit in a unit trust is like a share in a company, as it reflects your wealth in the unit trust. A trustee can be either a company or an individual. Advantages of unit trusts are that they are cheaper and more flexible than a company setup, non family members can own units, and also the fact that they can borrow money and carry on business. The main disadvantage is that the trustee has no discretion in the distribution of income, as the distribution is determined by the unit entitlement which was agreed when the trust was established.

Hybrid Trust
There are many types of hybrid trusts, but essentially they all have many of the common features of unit trusts and discretionary trusts.

However, a Hybrid Trust has a number of beneficiary classes equal to the number of unit holders. The trustee, at its discretion, may make both income and capital distributions to beneficiaries in proportion to the number of units they own. Therefore, as the beneficiaries are entitled to a fixed distribution of income, they can claim tax deductions in earning that income (ie.interest on borrowing) This effectively allows negative gearing.

Advantages of hybrid trusts are that they provide asset protection, offer the 50% capital gains tax relief and also have estate planning benefits. However, a disadvantage is that if they are not correctly established or run, they are at risk of being challenged by the Tax Office and may not protect the assets of the trust.

I hope this provides you with some background knowledge before talking with your Accountant and Solicitor.

AmandaBS
http://www.propertydivas.com.au
FREE online Property Resources

“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”

You should probably talk to an accountant to set up a trust – especially if your intention is to use it for investment. See what your conservative guy says and take it from there.

Terryw
Discover Home Loans
[email protected]
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