Properties & Pathways

Why tax deferred distributions can bolster your property trust investment


28 February, 2024

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For investors wanting strong cash flow, one of the greatest appeals of investing in a property trust is that income distributions are paid out regularly—sometimes quarterly; sometimes even monthly (like our own investment trusts). Regular income strengthens your cash flow and makes your financial future easier to forecast. And it can also help you come tax time, thanks to tax deferred distributions.

What are tax deferred distributions?

Tax deferred distributions occur when a property fund’s distributable income surpasses its net taxable income.

But how can this happen? The income should be the same, right?

The trust’s ability to claim tax deductions for various items, such as depreciation, capital allowances, interest and construction costs, means a discrepancy between the cash distribution income and net taxable income often exists.

And as a result, tax deferred distributions can be non-taxable when received by investors, serving as a reduction to the tax cost base of their investment in the property fund. That’s just one of the benefits. There are plenty more.

Benefits of tax deferred distributions

property investment funds contracts and making decisions

Aside from depreciation and other major tax deductions from a property investment, tax deferred distributions carry a range of benefits when it’s time to settle up your bill with the Australian Tax Office.

1. Deferral of tax

As the name suggests, the tax liability on these trust income distributions is deferred until the sale or redemption of an investor’s units in their property fund. That’s the point when what we call a Capital Gains Tax (CGT) event arises.

What is Capital Gains Tax? It’s not a tax, per se, but it’s the capital amount added to your taxable income during the tax year after, say, a property is sold and a profit recorded. This profit is then taxed according to your applicable personal income tax rate. Want more information? Check out our blog post on what capital gains tax means for commercial property investment.

2. Increases cost base (and reduces CGT)

Do tax deferred distributions increase an investment’s cost base? In the right circumstances, absolutely. Tax deferred distributions can be added to your investment’s cost base, potentially decreasing your capital gains tax as a result.

3. Tax discounts for long-term investors

As a reward for holding your Units for more than twelve months, you may benefit from a 50 per cent discount (for individuals) when calculating CGT. If you’re investing in a self managed super fund—as most of our own investors are—you’ll see a one-third discount for when calculating CGT.

With these sorts of numbers always changing, it’s crucial to check the ATO’s website before taking these words as gospel. This blog post is only meant as a guide.

4. Reinvestment opportunities

Investors can reinvest tax deferred distributions until a CGT event occurs, leading to compounding benefits over time. As lovers of strategic investing, this is a benefit we think is highly underrated.

Impact at the end of the financial year

Whenever June 30 approaches, investors in property trusts should consider the implications of tax deferred amounts on their tax returns.

Australian residents investing in property trusts may receive tax deferred amounts as part of their distributions, potentially reducing their income tax for the financial year.

Investors in real estate income funds stand to gain substantial benefits from understanding and leveraging tax deferred distributions—if you do, you’ll be better armed than most investors.

The term ‘tax deferred distributions’ mightn’t be common, but it should be. If you’re new to investing, consult with your accountant or financial planner for guidance and ensure you reap the tax benefits from tax deferred distributions if you’re eligible.

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Past performance is not indicative of future returns. Any information provided on this website has not considered the objectives, financial situation or needs of any investor; investors should consider whether it is appropriate to them to partake in a commercial property investment prior to investing, in light of their objectives, financial situation or needs. Every investor should obtain and consider the investment’s Information Memorandum before making a decision in relation to the investment.