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First Home Buyer Guidance
Step by step help with grants, finance and floor plans, move into your first home sooner.
A family trust is a formal structure that enables relatives to manage assets such as property or business holdings. Parents often create these trusts, acting as trustees on behalf of their children who are the beneficiaries. A family trust can be used to buy either an investment property or a home to live in, with the trust owning the property for taxation purposes (similar to a safety deposit box) and sharing the financial benefits with the beneficiaries.
Within a family trust, trustees have the authority to decide how income from the trust, such as rental returns or profits from selling property, is distributed among beneficiaries. This flexibility is the reason family trusts are often referred to as discretionary trusts. The Australian Taxation Office (ATO) notes that discretionary trusts are the most widely used trust type in Australia.
Purchasing real estate through a family trust is another option instead of buying as a single owner or as a couple. With individual ownership the property is in your name and you carry personal responsibility for the loan, whereas in a family trust the property is held by the trust and the loan is taken out by the trustees on behalf of the beneficiaries. In this structure the trustee is the registered owner of the property, however the property must always serve the beneficiaries. This is a legal duty requiring the trustee to act in the best interests of those beneficiaries.
While a family trust can provide advantages such as protecting assets and creating opportunities for tax planning, it also adds more complexity when compared with owning property as an individual or jointly.
One of the more common ways to purchase property through a family trust is by applying for a home loan often referred to as a trust loan. In this case, the trustee or trustees usually lodge the mortgage application with a lender on behalf of the trust. The lender will then review the financial strength and credit history of the trust much the same as they would for an individual borrower.
Applying for a loan under a trust is usually more complicated than a standard home loan, mainly because:
1) A trust loan involves several parties such as trustees, beneficiaries and company directors if the trust is corporate.
2) Many lenders insist that all trustees and beneficiaries act as guarantors which increases the paperwork required.
3) Trusts have their own documentation such as financial statements and the trust deed which lending specialists must examine.
Although it is possible to obtain a mortgage through a family trust, not every lender is willing to finance this type of arrangement. Where they do, the application may be passed on to their business or commercial lending division. The criteria for approving trust loans also differ considerably between lenders.
Because of their complicated legal framework, lenders often regard trust loans as carrying more risk. This typically results in higher interest charges, and in many cases, borrowing is limited to about 70 to 80 percent of the property’s market value.
• Tax savings through income distribution
Beneficiaries of a family trust are only taxed on the portion of the trust’s net income they receive. For property investments, trustees can allocate rental returns or capital gains in the most efficient tax manner each year, usually directing income to beneficiaries in lower tax brackets such as children or a spouse.
• Possible stamp duty exemption on transfers
Normally, moving an investment property from your personal name into a trust requires payment of stamp duty as well as capital gains tax (especially costly if the property has been owned for less than a year). However, in certain states, if control of a discretionary trust is transferred to adult children who are already beneficiaries, and the trustee is a company, stamp duty may not apply because the title and beneficial ownership remain unchanged under the corporate trustee. Similarly, when replacing an individual trustee, if stamp duty was already paid when the property entered the trust, no extra duty may be payable. This can occur if the trustee steps down, retires, or resigns, although rules vary across states.
• Simplified estate planning and profit distribution
A family trust can make succession smoother in the event of death, illness, or disability. The trust deed outlines how trustees should act, helping to reduce disputes among family members. In addition, distribution of wealth from investment properties is clearer since trustees are legally required to work in the best interest of beneficiaries.
• Asset protection from creditors
If a beneficiary experiences bankruptcy or financial problems, assets such as investment properties held in the trust are generally protected from creditors. This is because the trustee, not the beneficiary, is the legal owner of
• High setup costs
Creating a family trust for property purchases can be expensive because it usually requires legal assistance. The setup fees can range from about $3,000 to $5,000 (plus GST), depending on the complexity of the structure and the number of trustees and beneficiaries involved.
• No access to negative gearing benefits
When an investment property inside a family trust is negatively geared, meaning expenses are higher than the rental income, the loss cannot be claimed as a tax deduction against other income. This differs from an individual investor who may offset those losses.
• Main residence CGT exemption unavailable
If the property is used as a main residence for a beneficiary instead of being rented out, the trust is not eligible for the capital gains tax exemption normally applied to principal homes. This may result in a significant tax bill if the property is sold.
• Financing challenges
Securing finance can be more difficult as not every lender provides home loans for family trusts due to their legal structure and the limited liability of beneficiaries (who are not personally accountable for trust debts). The asset protection a trust offers can make repossession harder for lenders in case of default. On top of this, the lending process usually demands additional paperwork and stricter approval standards, discouraging some lenders.
To apply for a home loan using a family trust:
1) Make sure that every trustee and beneficiary meets the lender’s eligibility criteria, for example guarantors must be at least 18 years old.
2) Fill out the loan application form from the lender or broker, providing complete details about the trust structure and its financial standing.
3) Provide the trust’s financial and identification paperwork
4) The lender will assess the application, paying close attention to the credit history and financial position of each trustee involved in the loan.
5) If the loan is conditionally approved (subject to property valuation), carefully review the loan contract. All trustees and beneficiaries required by the lender must sign the agreement.
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