When looking to purchase commercial property in particular, we recommend talking to your accountant regarding the best purchasing structure.
There are a number of benefits of owning property in a family trust structure, some of which are highlighted below.
- Finance: When a property is owned in a trust where the rental income from that property covers the expenses of holding the property, including interest, this can improve borrowing capacity for future purchases as some financiers can exclude the liability when assessing borrowing capacity for a new property purchase. The corporate trustee also means the loan is non-regulated providing access to private lenders.
- Asset Protection: Property held in a trust may be more secure from creditors and legal claims, providing a level of protection against personal debts, particularly for business owners and directors.
- Tax Efficiency: Income generated by the property can be distributed in a way that minimizes tax liabilities.
- Privacy: Trusts may provide more privacy in asset ownership compared to holding property in an individual’s name, as the trust’s details are not publicly disclosed in the same way.
There are drawbacks to trusts, some of which are discussed below.
- Finance: Borrowing power may be less when owning via a trust, where the negative gearing benefits may not be available for trust owned properties when purchasing or refinancing.
- Setup and Ongoing Costs: Establishing a trust typically costs around $1,000 to $1,500 incorporating the trust setup and the corporate trustee setup. There are also additional costs including annual filing fees for companies and fees associated with preparing financials and tax returns.
- Complexity: Trusts can be complex to manage and administer. This complexity may require professional guidance, which can incur additional costs and time.
- Tax Implications: Higher taxes may be payable if the trust does not distribute income effectively or does not distribute all income. The land tax threshold in Queensland is also lower, leading to potentially higher land tax costs. The main residence exemption also does not apply to property held in a trust which could lead to capital gains tax being payable.
- Regulatory Scrutiny: Trusts can be subject to increased scrutiny from taxation authorities, especially if they are perceived as being used for tax avoidance.
The above list is not exhaustive, and it is important that you seek your own independent taxation, financial and legal advice before setting up a trust to purchase a property. Whilst we are qualified to advise in relation to the costs/benefits of trusts from a financing perspective, we are not able to advise you with respect to taxation and financial planning matters.
Personally, I’ve purchased a number of properties via a trust structure because it provided,
- flexibility around distribution of income for tax purposes,
- asset protection, and
- enhanced borrowing power for future purchases,
which outweighs the,
- higher land tax payable, and
- setup and ongoing fees associated with trust structures.
