by Jason Ginns
A discretionary trust is often considered when contemplating the purchase of an investment property or your business premises. The main advantages of a trust in this regard include –
- Asset protection through the use of a corporate trustee (if correctly structured)
- Flexibility when distributing profits each year to beneficiaries to minimise tax (when the property is positively geared)
- Flexibility in the distribution of any capital gains to beneficiaries to minimise tax on the future sale of the property
- Access to the 50% capital gains tax discount on the future sale of the property (as opposed to companies who don’t receive this discount)
When the disadvantages of a discretionary trust are discussed in regard to property ownership, being unable to access the tax benefits of tax losses inside the trust whilst the property is negatively geared is usually the main issue raised. However an often overlooked issue is land tax, and the punitive treatment of discretionary trusts for land tax in NSW.
Under the NSW land tax legislation, individual investors, joint owners or tenants in common, companies, and self managed superannuation funds, all receive the benefit of the land tax threshold. This means they don’t pay any land tax until the taxable value of the land they hold exceeds $432,000 (2015 threshold). However a discretionary trust (and most unit trusts) don’t receive this threshold, and are taxed at a flat rate of 1.6% of the taxable value of their properties.
If the taxable value of a property is $300,000, then a discretionary trust will incur an annual land tax liability of $4,800. However an individual or other entity mentioned above that is eligible for the land tax threshold, will be below the threshold and won’t have any land tax to pay.
As land tax is incurred and payable each and every year that the property is owned, it doesn’t take long for the land tax costs to multiply. The above $300,000 property owned for five years, would result in a discretionary trust paying $24,000 in land tax, as opposed to no land tax costs for an owner who is eligible for the land tax threshold.
The benefits of discretionary trusts need to be carefully weighed up against the disadvantages, including land tax. In this regard we sit down with clients and work through the pros and cons of holding a property in various entities, to ensure the structure of the property ownership best suits your situation. Once a property has been purchased it is very costly to change who owns the property, so you need to ensure you get this correct at the start.
In a recent scenario that involved a client purchasing a combined property and business, it was determined that the land tax costs of a discretionary trust outweighed the benefits of owning the property in a discretionary trust. However we were still able to arrange a structure that provided asset protection, annual flexibility of income distributions to minimise tax, access to the 50% capital gains discount, along with access to the land tax threshold to minimise the land tax payable each year.
If you are thinking about acquiring an investment property or business premises, please contact Lambourne Partners and we can sit down and work through these issues with you to arrive at the appropriate structure for your property.