Find out why using Trust to own investment property – Distributing income and capital gains
For taxation purposes, a discretionary trust provides maximum ﬂ exibility in terms of the annual net rental income of the trust and/or any capital gain on the sale of an investment property. This is because the trustee has the discretion to distribute different amounts of income and capital gain to different beneficiaries, having regard to the respective tax position of each beneficiary from year to year.
However, a unit trust will not have the same flexibility as the unit holders are generally entitled to the income and/or capital gain of the trust that is proportionate to their unit holdings. In this regard, unit holders of a unit trust are like shareholders in a company, who are generally entitled to distributions based on their proportionate interest in the entity.
An important point to note about trust distributions is that, under the current tax law, a trust must have resolved to distribute its annual income to its beneficiaries on or before 30 June each year to avoid the trustee being taxed on any undistributed income at the highest marginal tax rate.
Therefore, it is critical for the trustee of a trust to have made a trust distribution resolution to distribute all of the income to beneficiaries on or before 30 June each year.
This is probably less critical for a unit trust as the trust deed of a unit trust would often include a provision that automatically distributes the income and/or capital gain of the trust to the unit holders. In that regard, it may be worthwhile to consider the inclusion of a ‘default beneficiary clause’ in the trust deed of a discretionary trust. This would ensure that the inadvertent failure to distribute the income of a discretionary trust by the end of the year would mean that the default beneficiary or beneficiaries will automatically become presently entitled to the trust income, which would avoid the trustee being taxed on any undistributed income at the highest marginal tax rate.