Property Investment Structure Options

The main entity types available:
1. Individual Capacity/ Jointly with others
2. Company
3. Trust (many different types)
4. Self managed supefund (SMSF)

Why use a Discretionary Trust?
A discretionary trust being self-sufficient is important for borrowing capacity because lenders assess the trust’s ability to meet its financial obligations independently when considering loan applications. Here’s why this matters:

Impact on the Borrower’s Serviceability
When a discretionary trust owns an investment property:

– The trust’s income (e.g., rental income) is treated as a primary source of revenue.
– The trust’s expenses (e.g., loan repayments, property costs) reduce the overall cash flow.

If the trust is self-sufficient, it shows lenders that the trust can meet its financial obligations, including loan repayments, without requiring external support from beneficiaries or the trustee. However, when a trust is initially established, it typically has no assets or income, making it unable to independently secure a loan. In such cases, a party associated with the trust, usually the director of the trustee company, must act as a guarantor for the loan. This arrangement can affect the director’s personal borrowing capacity.

Once the trust demonstrates consistent profitability and is able to meet its obligations independently (cash flow positive), often lenders will no longer consider the guarantor’s personal finances in their assessment. This ensures that the director’s individual borrowing capacity remains unaffected from that particular trust for a future property acquisition. As lending policies frequently change, it’s advisable to consult a mortgage broker for accurate and up-to-date guidance. Please note that these insights are intended for general informational purposes only.

Key Considerations

While discretionary trusts offer significant benefits, the downsides—such as higher setup and running costs must be weighed up with the potential CGT and stamp duty consequences on restructuring in absence of such structure should not be overlooked. It’s essential to weigh these factors against your long-term goals and consult a financial advisor or accountant to ensure the structure aligns with your investment strategy.

Feel free to enquire with our team at info@hdqaccountants.com.au.