The podcast advises against using a trust for property investment for most individuals. Trusts are highlighted as complex, expensive to set up and maintain, and likely to generate negative cash flow due to borrowing costs. A key drawback is that trust losses cannot offset personal income, instead carrying forward without immediate tax benefit. Funding these losses often requires personal loans or gifts, potentially increasing non-deductible interest if sourced from a home loan offset account. Additionally, trusts may incur higher land taxes with no thresholds in some states, like New South Wales, and delay the property becoming cash flow positive by several years compared to individual ownership. While an "unlimited borrowing" strategy using a corporate trustee exists, lenders typically treat personal guarantees as debt for serviceability, and the trust must be self-sufficient—a challenge with typical interest rates exceeding yields. The host emphasizes seeking legal and mortgage advice but cautions that trusts are suitable only in rare cases, with the default recommendation being to avoid them.
This is The Structuring Podcast. Good day and welcome back. This is Terry Wall with The Structuring Podcast. And today's topic is, should I be using a trust to buy property? And the answer to that is probably no. So for the average person, a trust is probably a bad idea. Trusts are extremely complex. I've been learning about them for over 25 years now. And I'm still only touching the surface in what I know. So they're very complex. They're costly. You have the setup fees and then annual fees. Plus, the trust is going to actually borrow to buy a property and interest is going to be paid. That means it's likely to be negative cash flow and it's going to have a taxable loss. If that property was owned by an individual, that loss could offset other income in the person, the owner could negatively gear. That's also possible in a trust, but where the trust has no other income, it's going to create a loss. And that loss cannot be used by anyone else other than the trust. The trust is a separate taxpayer. So that means the loss will carry forward without any immediate tax benefit. There should be a tax benefit at some point in the future, but that could be 10 to 12 years away. The next thing is funding that loss. If there is a loss, the trust has no income or may have income, but the income is less than the expenses. So it's got no way to fund that. So the only way I can fund it is if you, the person controlling the trust, either gifts or lends in more money. And where do you get the money from? Well, if you have an offset account, you'd probably be taking cash from the offset account, lending it to the trust, possibly interest free. That will mean you start paying more interest on your loans, which could be good if your offset account is on a loan, which was used to invest, because that will increase your tax deductions and result in more tax saved. But for most people, they haven't paid off their main residence or they haven't paid off their own occupied debt yet. So taking money from an offset account, putting it into a trust, that means they're going to incur more interest on their home loan, and that interest is not going to be tax deductible. The other way they could do it is to borrow extra against property outside of the trust and then lend that money to the trust. But if you're doing that, you're going to have to charge interest on that loan, and that should be the same or more than the interest that you're being charged by the bank. So that in turn will create an even bigger loss in the trust. And that will continue. So in year one, there might be a loss of 10,000, the individual lands 10,000. In the next year, there might be a loss of 8,000, but then you've got the interest on the first lot of 10,000 dollars that you've landed as well. So that sort of compounds and delays the trust property from becoming cash flow positive. So if the property was in an individual's name, it might be, it might be self-sufficient in year eight, but if it's in a trust, it could be year 12. And the other thing is land tax. In some states, such as New South Wales, a trust gets no threshold. So whatever the land is worth, it's 1.6% of that per year in land tax. No threshold at all for trust. So imagine the land is worth 500,000. That's an extra eight grand a year in land tax every year. If the individual had no other property other than their main residence, they may get the threshold. So it might be nil. So 8,000 dollars in a trust compared to nil in a person. But every state has different land tax laws and that's something you should get legal advice on. It's not something you can account and do a tax agent can advise on because of state legislation. So what about the unlimited borrowing strategy? Well, that's possibly the best thing about a trust. If you have a company as trustee, the company is going to be the borrower and the individual is going to be a guarantor. So in theory, the debt of the trust is not going to be counted as debt of the individual because the individual is not the borrower. But in practice, most lenders will treat the guarantee as if it's a loan for serviceability purposes. And the other thing is they will sometimes disregard it. But for that to happen, the trust must be self-sufficient. And that's going to be hard if the interest rate is 6%, and the yield is 4%. Because there's going to be a loss. Just on the on the loan is going to be a loss. And then you've got all those other expenses plus depreciation, et cetera. So speak to a solicitor about whether you should use a trust. Speak to a mortgage broker about the effect of the unlimited borrowing strategy. But beware, there's a lot of misinformation out there. And there's not many mortgage brokers that actually understand trusts. So in summary, they can work, but in very rare cases. So the starting point is, no, don't use one. Unless you can be convinced, otherwise, all righty, that's it for this week. Thank you. And bye for now. [MUSIC PLAYING] You've been listening to the structuring podcast. Check out the show notes for today's episode at www.structuring.com.au/podcast.
Podcast Summary
Key Points:
Trusts are complex, costly, and often lead to negative cash flow and taxable losses that cannot be immediately offset against personal income.
Funding trust losses typically requires personal loans or gifts, which can increase non-deductible interest costs for the individual, especially if using home loan offset accounts.
Trusts may face higher land taxes (e.g., no threshold in New South Wales) and delayed cash flow positivity compared to individual ownership.
The "unlimited borrowing" strategy, where a corporate trustee borrows, is often ineffective as lenders still consider guarantees in serviceability, and the trust must be self-sufficient to avoid compounding losses.
Professional advice is essential, but misinformation is common; trusts are rarely advisable for average property buyers.
Summary:
The podcast advises against using a trust for property investment for most individuals. Trusts are highlighted as complex, expensive to set up and maintain, and likely to generate negative cash flow due to borrowing costs. A key drawback is that trust losses cannot offset personal income, instead carrying forward without immediate tax benefit.
Funding these losses often requires personal loans or gifts, potentially increasing non-deductible interest if sourced from a home loan offset account. Additionally, trusts may incur higher land taxes with no thresholds in some states, like New South Wales, and delay the property becoming cash flow positive by several years compared to individual ownership. While an "unlimited borrowing" strategy using a corporate trustee exists, lenders typically treat personal guarantees as debt for serviceability, and the trust must be self-sufficient—a challenge with typical interest rates exceeding yields.
The host emphasizes seeking legal and mortgage advice but cautions that trusts are suitable only in rare cases, with the default recommendation being to avoid them.
FAQs
For the average person, using a trust is probably not advisable due to its complexity, costs, and potential for negative cash flow.
Trusts are complex, costly with setup and annual fees, often result in negative cash flow, and losses cannot offset personal income, delaying tax benefits.
In some states like New South Wales, trusts have no land tax threshold, meaning tax is paid on the full land value, whereas individuals may benefit from a threshold.
It involves a company as trustee borrowing for the trust, with the individual as guarantor, potentially not counting as personal debt, but lenders often treat guarantees as loans for serviceability.
No, losses in a trust cannot offset personal income; they are carried forward within the trust, delaying any tax benefit until the trust generates future income.
Losses must be funded by the individual controlling the trust, either through gifts or loans, which can increase personal interest costs, often without tax deductibility.
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