The end of the financial year is just around the corner, and that means it’s nearly time to prepare your tax returns.
If you’re an Australian resident and investor in a property trust, you may be entitled to receive tax deferred amounts as part of your distributions.
These amounts may reduce the amount of income tax you pay from your investment in the trust in a given financial year.
Read on to learn more about the Australian income tax implications of tax deferred amounts from property trusts and how this may affect your upcoming tax return.
You should note this information is current only as at the date of this article and we suggest you consult a taxation adviser around your specific circumstances.
How is income from property trusts taxed?
To understand tax deferred amounts, it’s first important to understand how property trusts are taxed under Australian Taxation Law.
When you invest in a property trust, the trust will purchase a property asset or assets with the aim of earning income from the investment.
This income is distributed to investors via payments called ‘distributions’ which are predominantly comprised of the net Trust income after deducting cash expenses of the trust.
When you receive distributions from your investment in a property trust, they may contain ‘assessable components’ which 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.
What are tax deferred amounts?
‘Tax deferred amounts’ are distributions from a trust 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.
As a result, 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.
What are the potential benefits of tax deferred amounts?
Tax deferred amounts from property trusts have the potential to provide several benefits to long-term investors, depending on your individual circumstances. These may include:
- You may only be taxed in any financial year on a portion of the cash distributions you receive
2. 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 (CGT) rather than Income tax. Depending on your marginal tax rate and individual circumstances, this may reduce the total amount of tax that you may otherwise have paid
3. You may also receive a concessional discount for any capital gains you make depending on the length of time your investment is held and your entity type that holds this investment. These may include:
- As an individual or trust, you may be entitled to a 50% discount on any capital gains that are made if your investment is held for at least 12 months on capital account.
- Complying superannuation funds may be entitled to a 33.33% discount on capital gains if their investment is held for more than 12 months on capital account.
- For superannuation funds in an allocated pension phase, capital gains may be tax-free. Gains realised on investments held from the period prior to the allocated pension phase may also be tax-free.
Trilogy Funds’ property trusts
Australian resident investors in Trilogy Funds’ unlisted property trusts may be eligible to receive tax deferred distributions.
Viewing your tax deferred amounts
After the end of every financial year, we provide our investors with an annual tax statement and Attribution managed investment trust member annual (AMMA) statement to assist them in preparing their annual income tax returns. If applicable, these tax statements will disclose the ‘assessable’ and ‘non-assessable’ components of your distributions.
Please note, this article and its contents do not consider your specific financial or taxation position. We are not able to provide tax, or financial advice and we recommend you seek an independent professional consultation about the taxation treatment of your investment when completing your tax return.
Want to learn more about tax-deferred amounts from property trusts?
The information in this article contains general information and does not take into account your personal objectives, financial situation or needs. Trilogy Funds does not purport to provide tax advice. We recommend that you consult a licensed Tax accountant if you require financial advice that takes into account your personal circumstances. While every effort is made to provide accurate and complete information, Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) does not warrant or represent that the information in this article is free from errors or omissions or is suitable for your intended use. Subject to any terms implied by law and which cannot be excluded, Trilogy Funds accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omissions or misrepresentation in this information. Note: All figures are in Australian dollars unless otherwise indicated.