Purchasing an Investment Property with a Discretionary Trust

This guide walks you through the process step by step, ensuring that your trust is set up correctly and you understand the financial arrangements involved.

Step 1: Understand the Benefits and Suitability of a Discretionary Trust
Before setting up a discretionary trust, it’s crucial to understand whether it’s the right structure for your investment property goals. Here are some of the key advantages:

1. Tax Planning: A discretionary trust allows the trustee to distribute income, including rental income and capital gains, to beneficiaries in lower tax brackets, potentially minimising the tax liability for the family as a whole.
2. Asset Protection: Assets held within the trust are legally separate from the beneficiaries, providing protection against creditors or legal claims.
3. Flexibility: The trustee has discretion over which beneficiaries receive distributions and how much, providing flexibility over time as family and financial circumstances change.

Some Considerations:
– Land Tax Considerations
– No negative gearing
– Cost of on-going compliance i.e. ASIC Fees, Tax Filing Fees

Step 2: Consult an Accountant or Lawyer to Draft the Trust Deed
Once you’ve decided that a discretionary trust is right for your property investment, the next step is to have an accountant or lawyer draft the trust deed setting out the rules of how the trust will operate.

Step 3: Establish the Trust and Register with the ATO
Once the trust deed is drafted and executed, the next step is to formally establish the trust. Here’s what you need to do:

– Settle the Trust
– Obtain an Australian Business Number (ABN) and Tax File Number (TFN)
– Set Up a Bank Account

Step 4: Contact a Mortgage Broker to Arrange Finance
At this point, it’s time to arrange finance for purchasing the investment property through the trust. Contact a mortgage broker who is experienced with trust structures. Here’s how they can assist:

– Determining Borrowing Capacity
– Selecting the Right Lender
– Organising the Loan Application

Step 5: Purchase the Investment Property
Once finance is approved, the trust can move forward with purchasing the property.

Step 6: Manage the Property within the Trust
Now that the property is held in the trust, ongoing management is crucial for compliance and tax efficiency making sure all trust transactions are completed using the trust bank accounts.

Step 7: Lodge Trust Tax Returns
Each year, the trust will need to lodge a trust tax return. The trustee is responsible for ensuring the trust complies with all tax obligations, including reporting rental income, expenses, and capital gains (if the property is sold). It’s recommended to work with an accountant experienced in trust tax returns to ensure all obligations are met.

Remember to seek professional advice from a lawyer, accountant, and mortgage broker throughout the process to ensure the trust is optimised for your specific investment goals and financial situation. Book in a complimentary discovery call with one of our client managers to discuss business solutions.