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

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

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 the 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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