A family trust is an ideal structure when looking for tax-effective planning for your family. This is particularly relevant when looking to purchase property.
However, it’s important that you understand the tax and fiscal implications of owning property within a family trust structure.
In this article we discuss the additional fees and taxes involved with owning property within your family trust, and what this means for you.
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Benefits of owning property in a trust
There are three key benefits provided by owning a property within a family trust: tax minimisation, asset protection, and estate planning.
Tax minimisation
Owning an investment property within a family trust enables you to distribute its income in the most tax effective manner.
For example, say a husband and wife decide to buy an investment property, and they use a family trust structure to purchase the property. They can now choose how they distribute its rental income.
Then, one year later, the wife receives a large bonus from her job which tips her into the highest personal tax rate. Under the family trust structure, they’re able to distribute all the income from their investment property to the husband so that the wife remains in her current tax bracket.
Say that now two years after that, the couple have a baby. The wife decides to take a one year sabbatical from work. Given that she now has a low income and low tax rate, it now makes sense to distribute the property income to the her during this period.
Asset protection
When a property is held within a family trust, it’s not held in the personal names of the owners. Instead, it’s held in the trust's name with the owners as the beneficiaries. The trust itself is a separate legal entity.
This means that if the husband and wife get into financial or legal difficulty that’s not associated with the property, then the property is protected.
Estate planning
A trust provides a simple way to transfer a property from one generation to the next. As the trust deed clearly states what happens to the property upon the passing of the original owner, this ensures that the property remains in the hands of the family.
A trust can also help keep the property from being sold, while giving the next generation access to the property's income.
Land tax
Land tax is a type of tax that’s charged against land that you own which isn’t considered your primary place of residence.
While details vary from state to state, the basic idea is the same. If the combined value of all the land that you own is over a certain threshold, then you must pay tax on that land.
But when holding property within a family trust, land tax can become an issue.
Again, it differs from state to state, but if you hold land within a trust, then special rules usually apply. These typically result in you paying extra tax on the land that you own.
For example:
- In Victoria the land value threshold for a trust is reduced from $250,000 down to $25,000. See Land Tax calculator.
- In NSW there is no land value threshold applied, and you’re required to pay the land tax rate of 1.6% on the full land value.
Get in touch with your business adviser to discuss the land tax rules for your particular state.
Land tax exemptions
If you own property in a trust, but the property is considered your permanent place of residence, then you may be eligible for an exemption.
To be eligible for an exemption:
- As the property owner, you must be the trustee
- You must usually reside in Australia
- All beneficiaries of the trust must also occupy the property as their main place of residence, and have no other home.
So if this is your family home, then you’re likely to be exempt from paying extra land tax on your property.
However, if you own the property within your trust and use it as an investment property, then you’re subject to the rules outlined above.
Stamp duty
While owning a property in a trust can be useful for estate planning, you still need to be careful when changing the beneficiaries of your trust.
Typically, transferring property from the trustee to a beneficiary is fine, and no stamp duty will occur.
But when you look at changing beneficiaries to whom the property is transferred, then you may be liable for stamp duty. A stamp duty event may occur if:
- You create beneficiaries who were previously not named as beneficiaries
- You change all the default beneficiaries of the trust
- You significantly change the interest each beneficiary holds within the trust.
Other tax implications
While owning a property within a trust provides you with a tax-effective way to distribute the rental income, there are some tax issues to be aware of.
Trust losses
One particularly issue is that if your property is negatively geared and creates an investment loss, then the loss can’t be passed on to the beneficiaries of the trust. Instead, the loss must be utilised within the trust.
For example, say your investment property receives $25k rent each year. The loan on the property creates interest of $35k and you pay $5k in expenses. This equates to a loss of $15k each year.
As the property is held within the trust, the $15k loss must stay in the trust, and can only be deducted from the trust’s income. It can’t be distributed to the individuals, as the trust’s income can.
Capital Gains Tax
While a trust doesn’t pay income tax, this doesn’t mean it’s immune from capital gains tax (CGT). If you sell a property that’s held by the trust, this gets passed on to you as the individual and you’re required to pay tax on the capital gain that it makes.
Quickly, a capital gain is profit you make on the sale of an asset. So for example, the trust buys a property for $750k. You sell it later for $1.25 million. This $500k profit is the capital gain on the property, which the trust passes on to be paid by the individual/s involved in the trust.
Luckily, trusts are able to access the 50% CGT discount. Under this discount, if you’ve held your property for over 12 months, then you only have to pay tax on 50% of the capital gain.
But it still must be paid.
Other additional costs
Including the costs above, owning a property within a trust means—while not directly associated with the property—you also pay for the running costs of the trust.
These amount to approximately $1,500-$2,500 per year.
The final word
As you can see, there are a number of additional costs involved with owning property within a trust.
However, while it’s important to be aware of these costs, you shouldn’t let them dissuade you from purchasing property within a trust. Depending on your situation, the benefits may far outweigh the costs, and it’s a great way to leave a legacy for your future generations.
