The tax trick families can use to save thousands

Buying property is one of the biggest decisions a person will make, regardless of their wealth status.  

But it can be a daunting process, particularly as society evolves and what was once considered normal is no longer always the case. 

The changing structure of the family unit and the rise of self-employment means property purchases aren’t as simple as they once were, and buyers are faced with a range of ownership options. 

One of those options is to buy the property via a family trust. 

“A lot of buyers consider using a trust because it sounds like an exciting way of owning a property,” says financial planner, accountant and managing director of Financial Spectrum Brenton Tong. 

“The idea is often sold by an accountant or adviser as a way of paying less tax – however, unless there is an income disparity between a couple, this would mean involving external family members in some of your financial affairs, and an additional long-term cost that you can’t get rid of easily if you change your mind.”  

What is a family trust?

A family trust is a type of discretionary trust that is set up for the benefit of a family group.  

A trust of this type is a separate legal entity that can own assets and earn income, and is usually controlled by a single or group of family members. The people who receive the benefits are labelled as beneficiaries, often other family members. It will have its own tax file number and sometimes an ABN. 

The main purposes of a family trust are asset protection, tax minimisation and estate planning. 

“If the owner is someone that has a higher than average risk of being sued, such as a business owner or doctor, holding a property in a family trust may allow that asset to be protected from potential creditors and litigants,” says Mr Tong.

“There is also a benefit in a family unit where there are individuals above the age of 18 that are lower income tax payers, as an income-producing property can allocate its taxable income to the lower tax payer, lowering the overall tax liability for the family.”

Depending on your circumstances, there are also potential long-term cost savings, such as capital gains tax (CGT). Once a property is held in trust for more than 12 months, only half of the CGT is applicable. 

You can also save on estate planning expenses, with property able to be passed from one generation to another without stamp duty costs. 

Should you buy a home with a family trust?

There are both limitations and downsides to purchasing a home via a family trust, and it’s important to consider your circumstances carefully. 

“If you don’t have any beneficiaries to pass the income to, such as grandparents or children over 18, there are limited tax benefits from a family trust. And the ongoing maintenance costs will surpass the benefits,” says investment property advisor Niro Thambipillay. 

“Borrowing can be more difficult as banks often reduce the amount they will lend when property is brought via a trust.” 

According to principal mortgage broker and managing director of Benevolence Financial Group Samuel Philipos, purchasing a property in your own name is the best option if the costs of setting up and managing a trust outweigh any benefits of doing so.  

“The costs are in the form of time, money and effort,” he says. 

“Generally, if you’d like to purchase an owner-occupied property, without needing asset protection or tax optimisation, it may be [better] to purchase under the individual name.”

Mr Tong agrees, and warns the annual costs of compliance can be high. It’s also a tricky situation to get out of, once you’re in. 

“Once you’ve got a property in a family trust, sometimes it can be hard to get it out without stamp duty and/or capital gains tax. Taking a property out of a trust can often be considered the same as a sale.”

There’s also additional land tax to consider. 

“Buying a property in an individual’s name allows you to take advantage of the land tax threshold, often allowing property investors to pay no land tax on their first investment property.  

“When this property is in a family trust, the thresholds are different,  and a higher rate of land tax may apply.”

How to decide if a family trust is right for you

If you are considering a family trust, you’ll need to carefully weigh up the complexities of doing so, as making the wrong decision can have long-term consequences. 

There are three main steps to follow. 

“Firstly, determining the trust structure between discretionary, family, unit, hybrid or SMSF funds,” says Mr Philipos.  “Any standard trusts, excluding hybrid or SMSF, can be done online through Law Central or through an accountant.”

Secondly, you’ll need to create the trust deed and sign it. 

“This is a legally binding arrangement setting out the rules for establishing and operating the fund, deciding on the fund’s objectives, members and how the benefits can be paid are included.”

The third step is to place a nominal sum in the trust and send the trust deed to the state government for stamping. 

“Once that is done, the trust is operational.”

Depending on the complexity of the trust, set up costs range from $700 to $2000, with annual fees about the same amount. 

Before you do anything though, you should seek professional advice. 

“Typically, speak with your accountant,” says Mr Tong. “You need to choose between setting it up with a company as the trustee or a person as the trustee. There are pros and cons for each that you should discuss with your adviser.  

“Once you’ve worked out your trustee, a trust deed is then produced. The trust deed sets out what the trust is for and the rules that it will adhere to. Getting this wrong could mean an extra round of stamp duty and possibly capital gains tax. 

“Be wary of anyone that’s too enthusiastic about jumping right into recommending a family trust without first conducting due diligence on the assets you wish to put in there as well as your larger family structure.”