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Ask the Expert - How does investing through a trust work?

NEWS
Dorin Bentley - Bentley & Co - June 30, 2020

Using a Family Trust to invest in a Property Circle.

Under this arrangement, the family trust (FT) would use existing funds within the Family trust or borrowings to purchase units in the circle (UT)

This can be achieved in a number of ways including

  1. Using existing cash at bank (savings, term deposits that have matured, or selling existing assets such as shares)
  2. Borrowing cash from the beneficiaries (the beneficiaries put their existing cash into the FT for investment use, or alternatively purchases the units in the Unit trust directly with cash, on behalf of the Family trust)
  3. Beneficiaries borrow cash and either transfer to the FT or directly to the Unit Trust; in either case, the investment would be recorded as the FT owning the units in the UT.

The only issue with option 3 is that the beneficiaries cannot claim a tax deduction for the interest incurred (this is because in a FT structure, the beneficiaries do not have any present entitlement to income; this is not the case with a UT structure, since the income is distributed based on percentage of unit holdings, not based on the discretion of the trustee). If the entity investing in the unit trust borrows the funds to invest, then it can claim a deduction against any trust distribution from the UT.

Distribution of income from Circle (Unit Trust)

The Unit Trust (UT) does not pay tax itself. As with any type of Trust structure, the profit at the end of the financial year must be allocated to the beneficiaries (unit holders) and the income is taxed in the beneficiaries' return at the beneficiaries' effective tax rate.

When the Unit Trust accountant prepares the EOY reports, the beneficiaries of the Unit Trust will receive a Trust Distribution statement that will need to be declared in their tax returns (whether the return is for an individual, company, SMSF or family trust).

The distribution statement will only be issued if the Unit Trust makes a profit (trusts cannot distribute losses to beneficiaries). Please keep in mind that while profit is the ideal scenario, the purpose of the Unit Trust is to build wealth (capital gains) so even if the income distribution is very small, there should still be a Capital Gain distribution upon exit.

Properties within the Circle (Unit Trust)

The unit trust purchases multiple properties. There is not a separate trust for each property. There is a comprehensive unit holders agreement prepared by My Property Circles' legal team which outlines all the rules and procedures for running the trust, exit strategies and mitigation of risk. The UT itself will have no mortgages, and all the properties will be carefully researched by our Property expert, and managed by our trusted agents. Overall, we have a great team in place to ensure that the investors' assets in the UT are protected as much as possible. As with any investment, there is going to be some risk involved​, and it is important to speak to your financial adviser, accountant, lawyer or any other professional person on whose advice you can rely.

! Always seek advice before investing !

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The information provided in this website is general advice only. This website is not intended to be and does not constitute a Product Disclosure Statement or disclosure document as those terms are defined in the Corporations Act 2001 (Cth). It does not constitute an offer for the issue sale or purchase of any securities or any recommendation in relation to investing in any property or property circle. This website has been prepared without taking account of any particular investor's objectives financial situation or needs. While every care has been taken in the preparation of this website, Australian Property Circles Pty Ltd does not make any representation or warranty as to the accuracy or completeness of any statement in it, including without limitation any forecasts or opinions, and persons viewing this website should conduct their own inquiries and investigations. Forecasts, opinions and estimates are based on assumptions, contingencies and market conditions which are subject to change without notice, and may involve significant elements of subjective judgement and assumptions as to future events which may or may not be correct, and should not be relied upon as an indication of future performance. Past performance is not a reliable indicator of future performance. The information contained on this website is subject to change, and Australian Property Circles Pty Ltd is not responsible for providing updated information to any person. To the maximum extent permitted by law Australian Property Circles Pty Ltd disclaims all liability for any loss or damage which may arise out of the provision to or by any person of the information contained in this website. As this website has been prepared without taking account of any particular investor's objectives financial situation or needs, it is important that you seek appropriate professional advice having regard to your objectives financial situation and needs before making any investment decisions. Australian Property Circles Pty Ltd receives fees for operating each property circle,and may also receive fees for managing the assets of, and providing resources to, each property circle, as disclosed on this website. Any investment is subject to risk, including possible delays in payment and loss of income and principal invested. Neither Australian Property Circles Pty Ltd nor any of its associates, related entities or directors guarantee the performance of any investment or the repayment of monies invested. By accessing and using this website, you agree to be bound by our terms and conditions.

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