Is A Discretionary Trust Structure For Your Property Investments?
Should you use discretionary trusts to structure your property investment? Usually. But there are many beliefs people have about trusts, that are simply not true. Some believe everyone needs a trust – others claim no one does. That’s a bit simplistic and can lead to confusion.
As an accountant, I have seen people using trusts, that actually hurt their situation. Many people need one & don’t know it. For example, they would get asset protection and tax benefits if they set up a trust. Others have the wrong type of trust. But, for years, they missed out. So what’s the down low?
There are a few other types of trust too
In reality, there are various types of trusts, each serving different purposes. You could even have one that bakes bread – who knows. That would be rare – maybe a tad impossible. More common examples include discretionary trusts, unit trusts, hybrid trusts, and a few property investment trusts. As a result, choosing the right structure depends on individual circumstances and goals – and the right advisor.
Around 60% of individuals who seek professional advice benefit from a trust- if you are after a number. Some require a discretionary trust (most call this one a family trust). Others end up in a hybrid or unit trust. Still some may need a company structure.
Some don’t need a discretionary trust structure in their property investments
However, 40% of individuals find better solutions without a trust. The key is to match the structure to the specific situation and objectives. This is not easy. Trusts operate a large swathe of legislation – where there are many instances you could be making your trust non-compliant & void.
For example, you could end up giving back 25 years worth of tax savings back & owe hundreds of thousands of dollars to the ATO in a matter of days. The latter is bankrupting people instead of putting them on payment arrangements because people are not sticking to the payment arrangements. News spread about that and keeps people in line – at least that is what the ATO hopes.
Individual circumstances vary greatly. The right trust depends on what you want to achieve and your personal situation. It is crucial to have your needs assessed by a qualified expert. Without understanding your full circumstances, providing accurate advice is impossible. Think of it this way. If you don’t want the technical explanation.
Do you even need to structure at all?
Have you heard the saying, “if you are a hammer, everything looks like a nail?” If you get a headache and go to a GP, he will you Panadol. A neurologist will want scans. A psychologist will want to know what your father did to you 40 years ago. A neurosurgeon will want to cut you open eventually. Only one of them is right – but they are all trying to help.
So, if you talk to someone that fixed their problems by using trusts, they are going to tell you that’s the solution. Makes sense? Now for the technical version of that explanation.
Hybrid trusts, structure and property investment v/s discretionary trusts
For instance, asset protection often suits a discretionary trust or a business enterprise trust – a trading trust if you will. However, if a property is negatively geared, these trusts may not be suitable because they trap losses within the trust. This prevents you from offsetting them against personal income. In such cases, a hybrid trust might be a better option. It’s essential to note that there are many variations of hybrid trusts. Most of these are not appropriate.
ATO is not fond of trusts
The Australian Taxation Office (ATO) has issued alerts highlighting the misuse of some hybrid trusts. These alerts address cases where trusts were used in uncommercial ways, such as structuring investments to avoid ever making a profit. The ATO allows deductions for negative gearing because profits or taxable events, like capital gains, are expected in the future. Trusts designed to circumvent this principle attract scrutiny.
Another common issue is the vesting date of many trusts. A trust’s assets may automatically transfer to beneficiaries upon vesting, triggering capital gains tax and stamp duty. Choosing a trust without a vesting date can avoid these outcomes.
Trust structures must also consider asset protection. Many hybrid trusts fail in this area because issued units are assets that creditors can claim. Properly designed trusts prevent creditors from accessing these units, ensuring asset protection.
More property investment benefits with trusts
Trusts can also help reduce land tax. For example, some structures allow property investments to qualify for land tax thresholds in certain states. However, this varies, and some states, like NSW, do not provide thresholds for certain trust setups.
It is vital to use commercial and appropriate trust structures. A trust must provide a clear financial benefit, outweighing its costs. A professional can help calculate these benefits and ensure compliance with tax laws. Mistakes, such as buying property in the wrong name or structure, can lead to costly stamp duty and tax implications.
A proper analysis considers the costs and net benefits. For example, if a structure costs $8,000 annually but saves $15,000 in taxes or other expenses, the net benefit is $7,000. Such calculations ensure informed decision-making.
Not every trust is suitable for property investment. Some trusts, such as discretionary or unit trusts, have limitations. Property investor trusts are tailored for property investments and address common issues like negative gearing and asset protection. Additionally, these trusts often come with ATO product rulings, ensuring compliance and certainty regarding deductions. As you can tell, it is tricky decision – should you actually use discretionary trusts to structure your property investment?
What should you do then?
So, what can you do then? Read every blog ever written, knowing that none of them will actually fit your unique situation? No.
Consult a qualified accountant or specialist to understand the best strategies for your situation. Reach out to us on 1 800 672 670.
Trusts and related structures should provide clear advantages and align with your goals. Mistakes are costly, but with proper guidance, you can maximize benefits and minimize risks, when investing in property, structure it properly with discretionary trusts.