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Unlisted property trusts can have a tax benefit

Investors are cognisant of the capital gain and income property can deliver. But there’s a bonus in the form of a tax deferred component as part of their distributions that some might not realise.

For investors in unlisted property trusts, there’s a tax kicker to complement potential capital gains and regular income.

Trilogy Funds Chief Financial Officer Tyler Appleby says Australian investors may be entitled to receive tax deferred amounts as part of their income distributions, reducing the amount of income tax payable from a property trust investment in a given financial year.

“A key item of distributions that is overlooked is the tax deferred component of their investment. With the end of the financial year nearing, understanding if this component applies to them is important, because, if it does, it can deliver significant financial benefits.”

  • To understand tax deferred amounts, it’s imperative to know how property trusts are taxed.

    Property trusts acquire a property asset and/or assets with the aim of earning income that investors receive via payments called distributions. [Distributions predominantly comprise the trust’s net income after deducting cash expenses.]

    On receiving distributions, they may contain ‘assessable components’ that are assessable for income tax purposes, such as net rental income, and ‘non-assessable components’, such as tax deferred amounts. 

    Non-assessable components occur when the trust’s cash distribution exceeds the assessable components of the distribution. Tax deferred distributions generally arise due to non-cash deductions or tax concessions available to the trust such as depreciation. 

    So, what are tax deferred amounts? Appleby explains they are trust distributions that have been received by an investor but are not assessable for income tax purposes until a capital gains event occurs. 

    “Instead of being assessed in your income tax return in the year the distribution was received, tax deferred amounts act to reduce your investment cost base – that is, the taxable value of the amount invested into the trust, including any additional investments or redemptions. 

    “Consequently, the potential tax liability of these amounts is deferred until you redeem your units in the trust, or the asset is sold or transferred. The reduction to the cost base of the units may impact whether a capital gain or loss is made on your investment.”

    Appleby says there are three key benefits of tax deferred amounts. “Investors may only be taxed in any financial year on a portion of the cash distributions received.

    “As tax deferred amounts are generally only brought to account on the redemption of units in a trust, they are therefore subject to capital gains tax instead of income tax. Depending on an investor’s marginal tax rate and individual circumstances, it may reduce their tax liability.”

    He adds that investors may also receive a concessional discount for any capital gains made depending on the length of time the investment is held and the entity type that holds the investment.

    “Held as an individual or trust, investors may be entitled to a 50 per cent discount on any capital gains. For a complying superannuation funds, a 33.3 per cent discount may apply, and for superannuation funds in an allocated pension phase, it may be tax free. In all three situations, the investment must be held for at least one year.”

    Trilogy provides its investors with an annual tax statement and attribution managed investment trust member annual statement to assist them to prepare their annual income tax returns. If applicable, these tax statements disclose the assessable and non-assessable components of the distributions. 

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