Buying property in a trust and renting it off the trust

Question

Hi Julia
I have heard of people establishing a trust to buy a property then renting the property off the trust. I have been offered a job in Port Hedland and the company has offered me a $800 p/w tax free allowance to provide my own housing, which would normally be provided by the company. Could you please explain the pros and cons of using a trust in this way.I expect to earn around $100,000 taxable income. I currently have a investment property in QLD worth $380,000 which is making a loss of around $12,000. This property is currently my PPOR.

Answer

The ATO would consider the expenses your trust incurs, such as interest, in providing you with rental accommodation, to be a private expense even if you pay market rent to the trust, reference TR 2002/18. I too have heard of people doing this, I expect it is just that the ATO has not caught up with them yet. There is also an arrangement going around where the trust grants you a long term lease which you sell back to the trust when the property is sold, this does not add up when the market value substitution rule required under CGT is applied.
I’m not too sure what you are trying to achieve here. If you are receiving the allowance tax free then turning it into taxable income ie by paying it to an entity as rental income, then yes there maybe some negative gearing benefit but unless you set up a fixed unit trust it would be locked in the trust. In a fixed unit trust you would never be able to distribute profits to other family members so there is not much benefit even when and if you ever rent it to someone else.
If you buy the property in your name rather than the trust and later move to another area but decide to keep the house as an investment, if it is still negatively geared you can then offset the losses against your personal income simply and easily. The only way this could happen in a trust is if it was a fixed unit trust.
You must hold the property in your own or spouses name to qualify for the main residence exemption. If you buy a property in your own name you have the option of covering it rather than your QLD home with your main residence exemption. You do not have to make the choice, which property receives your main residence exemption until you sell one of them so you can wait and see which makes the greatest gain. You will need to keep good receipts for everything. $800pw would pay the interest on a $600,000 home so you maybe getting the home tax free, which is as good as getting a tax deduction of $800 per week.
I trust that you would still receive the tax free allowance even if you purchased a home in your own name. If not I am sure there would be other people there in the same boat so maybe buy a house but live in the house owned by the other person and they live in yours.
In short I can’t see any advantage in holding the property in a trust and you certainly wouldn’t be able to negatively gear it while you are living there.

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