This transcript was generated automatically and may contain small errors.
A lot of people say that you've got a trust, you've got a discretionary trust, and you can distribute income to anyone. That is not entirely true. I think a lot of the time when you go into a trust, you're doing it for those benefits. A discretionary trust is what we call a flexible income bucket. But legally, it's a structure, and if you do distribute out of the family group, then you can be hit with family trust distributions tax, which can be hit to you at 47%.
You've got to have this hierarchy, and this hierarchy sorts things out. There's no way you're going to buy a property unless you can borrow for it. So finance needs to come first to understand the rules. It doesn't mean that the finance broker is telling you, go set up a trust. It's just like, here's the rules that exist in today.
When it comes to buying property, structure plays a key part. Are you going to buy it personally? Are you going to buy it in your SMSF? Are you going to buy it in a trust? And in all of the structure-based conversations, there's one key professional that can give you the right guidance, give you the right advice, and actually know the depths of each structure.
That's the accountant. Now, it's not just important having any accountant. You want an accountant that understands the world of property investing and the world of real estate, not just structures in isolation, so they can bring the worlds together. And so when you have that person on your team, latch on, don't let go, because that person can really propel you and help you build a portfolio, but also help you manage your taxes and affairs right. In today's episode, we've got Rinesh from Incentum Group, who is a repeat guest here with us, joining us to talk more about trust, especially as it's such a hot topic in today's discussion.
Now, even though we are covering this, just remember, it's general guidance only, and for more financial advice, speak to a licensed and qualified financial advisor or tax professional. If you'd like to reach out to Rinesh, the description's also in the notes, and you can also reach out to IncentumGroup. com. au. Let's get into today's episode.
Nerd alert! Property nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. So, Rinesh, there's been a lot of noise lately about trusts. Over the past couple of months, there's a couple of major lenders that have pulled out of trusts altogether. I guess I wanted to talk a little bit about that, and then a bit of two-part question, talk about just going back to basics, you know, because I think those lenders, a lot of people feared that they pulled out of it for some sort of impending regulatory change or something like that, but really, there's just some, you know, extra requirements that are going to be imposed on lenders, brokers, accountants for trust setups and ongoing management.
So, can we talk a bit about that? Sure, sure, Jack. Thank you once again. Well, wonderful to be back here again and with all of you and looking at property again. With trust, I think let's put it into simple terms.
What is actually a trust? I would usually say a trust, a discretionary trust, is what we call a flexible income bucket. But legally, it's a structure. So, it is a trustee that actually manages property for the beneficiaries of the trust, and the trust is governed by what they call a set of rules which are contained in the trust deed. With respect to a discretionary trust, every year, the key word here is the word discretion.
So, every year, the trustee actually has the ability to make a decision as to who gets the distributions and in what proportions. So, there is this added flexibility of having a family trust and discretionary trust when it comes to distributing income and capital gains. Trust in the context of a property, we would usually try and identify a few details here. So, the trust actually owns a property. It's not under the individual name.
When you own a property, investment property under a trust, the rental profits, capital gains are able to be distributed each year to a group of family beneficiaries. Thirdly, if you are looking at trust from a perspective of estate planning and also succession and risk protection, then a trust is a very viable structure which can fit within your asset protection strategy. So, those are kind of the common fundamentals of a trust that you would want to have a look at. So, that's the basics, yeah. So, when you've got a family that's coming to you and they're trying to decide whether they're going to purchase in a trust or in the personal name, what are some of the things that you, you know, how you qualify that person and find out what's best for them?
Sure, sure. This is an interesting question because it involves a good discussion with your client and also asking the right questions to your clients. Firstly, the question we would ask is, what is your plan of using this trust? Whether is it to hold a single property or are you planning to grow a multiple property portfolio? So, if it's the latter, you're wanting to grow a multiple property portfolio, then we would look at leaning towards a family trust to use in that particular situation.
So, it just gives you, as you build your portfolio, you've got flexibility of distributing those large incomes and capital gains in the future. Secondly, we would look at the income abilities or the income earning capacities of the people in that trust. And there's, if you have one partner who's earning a high income, a second partner, usually a wife who's maybe at a lower income or she may be on maternity leave, or there are other adult beneficiaries within the family group. So, the trust, having a discretionary trust gives you the flexibility of managing the tax within the rules amongst the various beneficiaries. And third, most importantly, is when it comes to risk and estate planning.
So, if you've got clients who are in high risk professions or are running businesses as well, having a discretionary trust within your investment portfolio allows you to have some level of asset protection as well. So, it's tying up all those three questions with your clients, understanding what their goals are, long-term goals, short-term goals, and then mapping out a plan for them long-term. Rinesh, I think for a lot of conversations or a lot of what we hear on the media, people are usually talking about discretionary trusts. And I don't think that a lot of people talk about unit or fixed trusts as much. So, from what you've seen, where does it make sense or what are the sort of benefits or how do you weigh up things when you're thinking between a unit or a fixed trust versus a discretionary trust for property investors?
Sure, sure. So, trusts, as you know, there are various kinds of trusts. So, commonly it's a family or discretionary trust, but there are fixed trusts, unit trusts, and there's also a component of what we call hybrid trust as well. Unit trust or fixed trust is what we call, it's a trust version of a company. So, a company issues shares, whereas a unit trust issues units, and the unit holders would have fixed entitlements in the unit trust.
So, for instance, I would have 40%, you would have 60%. So, we have a fixed entitlement to the income and capital of the trust. There is no discretion in a unit trust. It's more about what your entitlements are, and that's how you will get your distributions every year. I tend to lean towards a unit trust compared to a discretionary trust, compared to what is the particular situation presented by the client.
If you've got two or three unrelated parties who are business partners or who are friends, then I lean towards having a unit trust in that scenario. The second question is, what are the contributions that these individuals are going to make? If they're making unequal contributions, then I would lean towards a unit trust because you can then easily match the units with the contributions that they have made to the particular trust. Thirdly, there's a lot of clients and business partners, they want more certainty and clarity. They prefer that they get their fixed entitlement because they're contributing X number of dollars, and they also want to have exit options as well.
So, a unit trust actually allows you to easily transfer units rather than selling the property itself. So, it's a structure where you can transfer units, you can bring in more unit holders, and to facilitate is to have a good unit trust deed and also to have what they call a unit holders agreement as well. So, it's managing and understanding what your client wants and requirements are, and a unit trust can work in that instance. Makes sense. Rinesh, for trust, a lot of people kind of associate trust with tax savings automatically.
Now, I think there's quite a few misconceptions, especially as we start to talk around the different types of trusts and, hey, what actually tax looks like inside the vehicle of a trust. So, what are the common things that you see when you talk to clients that, you know, the common misconceptions that they have, whether it's around fixed trusts or discretionary trusts around tax savings specifically? Sure, sure. So, the three common myths that I usually come across regularly from clients who have been out there speaking with people and friends is one that a trust automatically saves you tax, which is not true to a certain degree. Usually, when clients actually buy a property which is heavily negatively geared, then there's little or no income to distribute and there's trust losses.
So, you actually don't get any benefit of the negative gearing because it is trapped in the trust. If you had owned that property in your personal name, then you would get the benefit of the negative gearing. But this is in the early years that you have to put up with, you know, that you don't get the benefit of the losses. But as trust We definitely look at the state rules around the various trusts. So we look at how a discretionary trust is being taxed and how a unit trust is being taxed as well.
In some states, there are preferential treatment for unit trusts. They do get the threshold. For instance, for New South Wales, it's a million and seventy-five threshold for a fixed trust. In New South Wales, the fixed trust has to meet certain definitions in its deed. So what we call it's a New South Wales land fixed trust.
So there's a specific definition for New South Wales fixed trust. So if you have that particular unit trust, then you get the threshold. But if you choose any other fixed trust and use it in New South Wales, you may not qualify. Wow, that's a big one for people to get right. They just assume immediately, oh no, I've set up the right type of trust, I should get this land tax benefit.
Yeah, no, that's true. A lot of people set up fixed trust, but then it doesn't actually meet the New South Wales requirements. So there is a specific rule around how New South Wales trusts are set up. So we do look at the fixed trust, we do look at the discretionary trust. But overall, we do want to understand the client's position.
We also want to understand where that property is being bought, what are the other strategies around the property, the yields, the capital growth. And in some cases, you may end up paying the land tax and you get a tax deduction for the land tax. But in your overall strategy, it may work for you because you may get that income growth and the capital growth. Loving the show and keen to invest? Well, book your free discovery call and we'll actually walk you through how to build a high growth portfolio without all the guesswork.
Just jump onto the link in the show notes or visit investorkit. com. au to book your discovery call. And now let's get back into the show. Now on this unit trust land tax benefit, and I say benefit because it's in comparison to a discretionary trust, where in New South Wales in particular, it's a lot cheaper because of the higher threshold with the unit trust.
Is it a separate threshold to you personally? And so what I mean by that is personally, you have that million and 75 threshold in New South Wales from a land tax. But let's just say I've exhausted that and I'm up to that point. But then I set up a trust that's a unit trust and has those special provisions with New South Wales. Is that an extra million and 75 I have now?
Or is that this million and 75 total based on what the unit holders have? And I therefore am a unit holder. I could say 100% it's me only and I'm the only unit holder of that unit trust. Does it just water down to like that individual and what their threshold is, which in that case, a million and 75 is personal. I've already used it up.
So there is no advantage now to this unit trust giving me an extra million and 75 or no, because it is a unit trust. It's separate to me personally. I have two side by side million and 75 thresholds. What's it in this scenario? In that particular scenario, within the rules with how you actually register your unit trust with the land tax authority, you may need to disclose the unit holders.
And then in that scenario, the land tax authority will aggregate all your holdings and apply that one million and 75 threshold for a fixed trust. In New South Wales, the fixed trust has to meet certain definitions in its deed. So what we call it's a New South Wales land fixed trust. So there's a specific definition for New South Wales fixed trust. So if you have that particular unit trust, then you get the threshold.
But if you choose any other fixed trust and use it in New South Wales, you may not qualify. Wow, that's a big one for people to get right. They just assume immediately, oh no, I've set up the right type of trust, I should get this land tax benefit. Yeah, no, that's true. A lot of people set up fixed trust, but then it doesn't actually meet the New South Wales requirements.
So there is a specific rule around how New South Wales trusts are set up. So we do look at the fixed trust, we do look at the discretionary trust. But overall, we do want to understand the client's position. We also want to understand where that property is being bought, what are the other strategies around the property, the yields, the capital growth. And in some cases, you may end up paying the land tax and you get a tax deduction for the land tax.
But in your overall strategy, it may work for you because you may get that income growth and the capital growth. Loving the show and keen to invest? Well, book your free discovery call and we'll actually walk you through how to build a high growth portfolio without all the guesswork. Just jump onto the link in the show notes or visit investorkit. com.
au to book your discovery call. And now let's get back into the show. Now on this unit trust land tax benefit, and I say benefit because it's in comparison to a discretionary trust, where in New South Wales in particular, it's a lot cheaper because of the higher threshold with the unit trust. Is it a separate threshold to you personally? And so what I mean by that is personally, you have that million and 75 threshold in New South Wales from a land tax.
But let's just say I've exhausted that and I'm up to that point. But then I set up a trust that's a unit trust and has those special provisions with New South Wales. Is that an extra million and 75 I have now? Or is that this million and 75 total based on what the unit holders have? And I therefore am a unit holder.
I could say 100% it's me only and I'm the only unit holder of that unit trust. Does it just water down to like that individual and what their threshold is, which in that case, a million and 75 is personal. I've already used it up. So there is no advantage now to this unit trust giving me an extra million and 75 or no, because it is a unit trust. It's separate to me personally.
I have two side by side million and 75 thresholds. What's it in this scenario? In that particular scenario, within the rules with how you actually register your unit trust with the land tax authority, you may need to disclose the unit holders. And then in that scenario, the land tax authority will aggregate all your holdings and apply that one million and 75 threshold for a fixed trust. In New South Wales, the fixed trust has to meet certain definitions in its deed.
So what we call it's a New South Wales land fixed trust. So there's a specific definition for New South Wales fixed trust. So if you have that particular unit trust, then you get the threshold. But if you choose any other fixed trust and use it in New South Wales, you may not qualify. Wow, that's a big one for people to get right.
They just assume immediately, oh no, I've set up the right type of trust, I should get this land tax benefit. Yeah, no, that's true. A lot of people set up fixed trust, but then it doesn't actually meet the New South Wales requirements. So there is a specific rule around how New South Wales trusts are set up. So we do look at the fixed trust, we do look at the discretionary trust.
But overall, we do want to understand the client's position. We also want to understand where that property is being bought, what are the other strategies around the property, the yields, the capital growth. And in some cases, you may end up paying the land tax and you get a tax deduction for the land tax. But in your overall strategy, it may work for you because you may get that income growth and the capital growth. Loving the show and keen to invest?
Well, book your free discovery call and we'll actually walk you through how to build a high growth portfolio without all the guesswork. Just jump onto the link in the show notes or visit investorkit. com. au to book your discovery call. And now let's get back into the show.
Now on this unit trust land tax benefit, and I say benefit because it's in comparison to a discretionary trust, where in New South Wales in particular, it's a lot cheaper because of the higher threshold with the unit trust. Is it a separate threshold to you personally? And so what I mean by that is personally, you have that million and 75 threshold in New South Wales from a land tax. But let's just say I've exhausted that and I'm up to that point. But then I set up a trust that's a unit trust and has those special provisions with New South Wales.
Is that an extra million and 75 I have now? Or is that this million and 75 total based on what the unit holders have? And I therefore am a unit holder. I could say 100% it's me only and I'm the only unit holder of that unit trust. Does it just water down to like that individual and what their threshold is, which in that case, a million and 75 is personal.
I've already used it up. So there is no advantage now to this unit trust giving me an extra million and 75 or no, because it is a unit trust. It's separate to me personally. I have two side by side million and 75 thresholds. What's it in this scenario?
In that particular scenario, within the rules with how you actually register your unit trust with the land tax authority, you may need to disclose the unit holders. And then in that scenario, the land tax authority will aggregate all your holdings and apply that one million and 75 threshold for a fixed trust. In New South Wales, the fixed trust has to meet certain definitions in its deed. So what we call it's a New South Wales land fixed trust.
