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A discretionary trust is not a legal entity, but the trustee of the trust can hold property as trustee. There are a number of things to consider though as in some states a trustee holding property could result in up to $11,000 more land tax per year than an individual holding property. There are also estate planning and lending issues to consider. Legal advice is recommended.

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The main residence is virtually the only tax free appreciating asset that a person can buy so it is important to learn about the main residence exemption so you can use it to your advantage. However now all main residences will be exempt from CGT.

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A Company is a separate legal entity and can own property just like a person can. However there are a number of issues to consider before using a company to own property and some of these issues include the following.

• CGT and income tax is a flat rate
• Losses are trapped
• Borrowing requires directors guarantees
• Land tax
• Succession - you cannot leave the property via your will
• Stamp duty on the transfer of shares in the company
• Asset protection

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A testamentary trust is any trust set up in a person’s will and a testamentary discretionary trust is a discretionary trust set up in a person’s will. They have all the benefits of a discretionary trust set up during a person’s lifetime, but with more. Minor children can be taxed at adult rates of tax on income derived from a deceased estate, including indirectly via a testamentary discretionary trust.

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Land Tax is a State based revenue grab with each state having completely different laws. Generally people will be assessed for land tax based on the value of the land that they own in a particular state that is over the land tax free threshold with the principal place of residence usually excluded.

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Lenders are always ignoring instructions and often put extra borrowed funds into the wrong account and this can cause deductions of interest to be lost if this were to happen. But there is a simple solution where this happens.

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Some people put money into a loan in order to save interest. This is repaying the loan. When that money is redrawn it is considered new borrowings for tax purposes. Because of this you should never temporarily park money into a loan which is deductible. This is because when you redraw the money later you will potentially lose the deductions on that portion of the loan resulting in paying more tax.

The better alternative would be to park the money into an offset account attached to the investment loan so that the loan itself will not be reduced.

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A mixed loan is a loan that has been used for more than 2 uses. An example is someone who has borrowed to buy a house paying extra off the loan and then using the redraw facility to borrow money to use as a deposit on an investment property.

Mixed loans should be avoided in situations like this as every deposit into the loan will reduce the deductible debt as well as the non-deductible debt. This will cause more tax to be payable.

It is also impossible to offset one portion of a mixed loan, so an offset account attached to a mixed loan could lead to deductible interest being reduced which leads to loss of tax savings.

If you have a mixed loan with some of the borrowed money having been used to invest, you would need to apportion the interest and working this out will become increasingly difficult the more that is paid into the loan and redrawn again. It is best to avoid in most cases.

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What is Debt Recycling? 

It is a tax strategy which involves converting non-deductible debt into deductible debt. This doesn’t involve investing in something you otherwise wouldn’t have, but shows how you can structure the way you do it to save income tax.

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The 4 main roles in a discretionary trust are:
  a)  Trustee
  b)  Settlor
  c)  Appointor
  d)  Beneficiaries

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