Property Negative gearing -Family trusts

Negative gearing arises initially when the cost of owning an investment property is greater than the income received on the investment property. Often negative gearing occurs when the property is initially acquired and although negative gearing can lead to preliminary losses, quite often it is used as an effective tool for tax benefits.

A Family trust offers several advantages to investing in property with the intention of gearing it negatively initially. However, there are disadvantages associated with this strategy as well.

A Family trust is where there is no fixed criteria of entitlements for the beneficiaries in the trust. It is up to the discretion of the trustee to determine which beneficiary is to receive trust income and what amount of that trust income.

Advantages

• Income splitting – Any income earned once the investment has become positively geared is permitted to be distributed in the most tax effective manner allowed by the trust’s deed.
• Asset protection – A corporate trustee gives greater asset protection in a Family trust. Further advice needs to be sought from either a family trust accountant or lawyer to ensure the structure is set up adequately from an asset protection point of view.
• CGT Discount – You are entitled to the 50% Capital Gains Tax discount in a Family trust structure provided you hold the investment for more than 1 year.Apart from receiving the discount the income can also be split in a tax effective way.

Disadvantages

• Tax losses – Any tax losses from investing in a negatively geared investment property will essentially be locked within the trust. The trust is unable to distribute losses to beneficiaries and the losses have to be carried forward to offset future profits.
• Lost benefits – Similar to tax losses, any negative gearing gained from the property will essentially be lost within the trust and the individual will be unable to claim them in their name.
• Costs - Costs for setting up a family trust along with ongoing accounts and tax returns are greater when compared to investing in your personal name.

Investing in properties with negative gearing through a Family trust has some advantages. However, there are several significant disadvantages and risks that need to be considered as well. As with all investment structures, the ideal structure for each individual depends solely on themselves and their wants and needs. It is imperative to consider all options and seek advice from a family trust accountant who specialises in this area.

Rizwan Inayat is the Director of iTrust Tax and Accounting. He has over 10 years of experience in tax, accounting and financial services.