Why Buying Property in a Trust Could Destroy You

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Why Buying Property in a Trust Could Destroy You

Introduction

Buying property is one of the most common ways Australians build wealth. But the ownership structure you choose has long-term tax and legal consequences. Many investors are advised to buy under a family trust to protect assets, split income, or manage estate planning. The problem is that in New South Wales, this can trigger major land tax liabilities that most investors do not anticipate.

This blog explores the land tax trap, capital gains tax risks, the pros and cons of different structures, and strategies to avoid paying unnecessary tax. Trinity Accounting Practice has advised property investors since 2003, and we know how costly the wrong decision can be.

The Land Tax Trap in New South Wales

No Threshold for Trusts

• In NSW, land tax applies once your land value exceeds the threshold.
• For the 2025 land tax year, the threshold is $1.075 million.
• Individuals and companies get this threshold. Trusts classified as “special trusts” do not.

This means if you buy through a family trust, discretionary trust, or most unit trusts, you pay land tax from the very first dollar of land value. The rate is 1.6% plus premium surcharges at higher levels.

Example

• Land value $1,000,000 in a trust → annual land tax bill = $16,000.
• Same land value in a personal name or company → no land tax payable.

Over 5 years, that is $80,000 of unnecessary costs, with no benefit for the investor.

Special Trust Classification

Revenue NSW states that special trusts are not eligible for the threshold. A fixed trust may qualify if strict requirements are met, such as all unit holders having present entitlement to income and capital. These must be proven through deed wording and trustee obligations.

Companies and Land Tax

Company Structures

Companies are entitled to the land tax threshold, the same as individuals. But this applies only to the first company. Using multiple companies does not give multiple thresholds. Revenue NSW aggregates related entities to prevent avoidance.

Pros of Company Ownership

• Access to the threshold.
• Clear structure for ownership and liability.
• Consistent company tax rate on profits.

Cons

• No 50% CGT discount for companies.
• Less flexibility in income distribution compared to trusts.

Personal Ownership of Property

Advantages

• Land tax threshold applies.
• Eligibility for 50% CGT discount if property held more than 12 months.
• Access to the six-year absence rule for former main residences.

Disadvantages

• Limited asset protection.
• Income taxed at personal marginal rates, which may be high.

Personal ownership works well for smaller portfolios or where the investor’s marginal rate is not excessive.

SMSFs and Property Ownership

Benefits

• 15% tax rate on income.
• 10% CGT on assets held more than 12 months.
• Protection from personal bankruptcy.

Limitations

• Cannot exceed contribution caps.
• Strict borrowing and related-party rules.
• Properties must meet sole-purpose test for retirement.

While attractive for retirement planning, SMSF property must be structured carefully to avoid penalties.

The Capital Gains Tax Timing Disaster

Selling in the Wrong Year

One of the biggest mistakes property investors make is selling during a high-income year. For example:

• You receive a work bonus or commission.
• You sell an investment property in the same financial year.
• Your capital gain pushes you into the top marginal tax bracket.

At a 45% tax rate plus Medicare levy, the tax liability can erase much of the profit.

The Six-Year Rule

If you move out of your home and rent it, you may treat it as your main residence for up to six years. Selling within this period allows full CGT exemption. Forgetting to move back in or selling after six years forfeits the exemption.

Company Ownership CGT Issue

Companies are not entitled to the main residence exemption or the 50% CGT discount. A property sold under company ownership will always face full CGT with no discounts.

How Property Spruikers Mislead Investors

Many online property “gurus” promote trusts as the ultimate solution for asset protection and tax planning. The pitch sounds convincing:

• Split rental income across family members.
• Protect assets from lawsuits or family disputes.
• Distribute profits to low-income beneficiaries.

The problem is that none of this offsets the land tax trap. Investors end up paying tens of thousands in land tax, wiping out rental returns.

Always seek independent tax and accounting advice before choosing a trust.

Refinancing Instead of Selling

The Equity Strategy

Instead of selling and triggering CGT, refinancing allows you to release equity tax-free:

• Property purchased in 2022 for $1.29 million.
• Value in 2024 = $1.61 million.
• Growth = $320,000.

By refinancing at 80% LVR, you can access $250,000 without selling. The withdrawal is not taxable because it is borrowed funds. Interest on the refinanced portion is deductible if funds are reinvested.

Benefits

• No CGT event.
• Retain ownership and long-term growth.
• Use equity to buy another investment or fund lifestyle needs.

Strategies to Minimise CGT

1. Main Residence Exemption
If you live in the property as your principal place of residence, you may be fully exempt from CGT.

2. Six-Year Rule
Renting your former home for up to six years can still qualify it as your main residence, provided you do not nominate another property.

3. 50% CGT Discount
Individuals and trusts qualify for a 50% discount if property is held for at least 12 months. Companies do not.

4. Market Valuation Reset
When converting a home to an investment property, a formal valuation allows you to reset the cost base, reducing future gains.

5. Adding Costs to the Cost Base

• Renovations.
• Stamp duty.
• Legal fees.
• Holding costs (if capitalised).

Proper documentation increases your cost base, reducing taxable gains.

Pros and Cons of Buying Property in a Trust

Pros

• Asset protection.
• Flexibility in distributing income.
• Useful in estate planning.

Cons

• No land tax threshold in NSW.
• Ongoing compliance and accounting costs.
• CGT complexity and timing issues.

Trusts can work for high-risk professionals or families with complex succession planning needs, but they are not suitable for every investor.

Choosing the Right Structure

Questions to Ask

• What is my long-term investment goal?
• Do I prioritise asset protection or minimising land tax?
• Will I hold for rental yield or sell for capital gains?
• What is my current and expected income tax bracket?
• Do I plan to pass assets to children or family members?

There is no one-size-fits-all answer. Each investor’s situation must be reviewed with a tax professional.

How Trinity Accounting Practice Helps Property Investors

Since 2003, Trinity Accounting Practice has advised thousands of clients on property investment structures. Our services include:

• Reviewing ownership structures.
• Calculating land tax and CGT exposure.
• Setting up companies, SMSFs, and trusts.
• Preparing tax returns and compliance documents.
• Advising on refinancing, timing of sales, and structuring for long-term wealth.

We combine accounting expertise with practical property knowledge to prevent clients from falling into costly traps.

Final Thoughts

Property investment is not only about choosing the right location or timing the market. The ownership structure is equally important. Buying through the wrong structure in New South Wales can expose you to annual land tax bills of $16,000 or more and wipe out your profits.

Before making any purchase, get professional advice. At Trinity Accounting Practice, we help you evaluate whether personal ownership, company structures, SMSFs, or trusts make sense for your goals.

👉 Trinity Accounting Practice
✅ Accounting Firm in Beverly Hills
☎️ 02 9543 6804
📍 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 www.trinitygroup.com.au
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