Understanding tax deferred amounts from property trusts

As an Australian resident and property trust investor, you might be eligible to receive tax deferred amounts along with your distributions. These amounts can potentially lower the income tax you owe on your investment for a particular financial year. To learn more about the implications of these tax deferred amounts on your Australian income tax and how they might impact your upcoming tax return, keep reading. However, please keep in mind that this information is only current as of the date of this article, and it’s advisable to consult a taxation adviser regarding your specific situation.

How is income from property trusts taxed?

Before understanding tax deferred amounts, it’s essential to comprehend how property trusts are taxed according to Australian Taxation Law. Property trusts purchase assets, primarily properties, with the objective of earning income from the investment. This income is then distributed to investors in the form of payments called “distributions,” which consist mainly of the trust’s net income after deducting cash expenses. These distributions may contain “assessable components” that are liable for income tax, such as net rental income, and “non-assessable components,” such as tax deferred amounts. Non-assessable components arise when the cash distribution exceeds the assessable components of the distribution. Tax deferred distributions usually result from non-cash deductions or tax concessions available to the trust, such as depreciation.

What are tax deferred amounts?

When an investor receives distributions from a trust that are not liable for income tax until a capital gains event occurs, they are known as “tax deferred amounts.” These amounts are not assessed in the income tax return of the year in which they were received. Instead, they reduce the cost base of the investment, which is the taxable value of the invested amount, including any additional investments or redemptions. This defers the potential tax liability until the investor sells or transfers the asset or redeems their units in the trust. The reduction in the cost base of the units may impact whether a capital gain or loss is made on the investment.

What are the potential benefits of tax deferred amounts?

Depending on individual circumstances, tax deferred amounts from property trusts can provide several benefits to long-term investors, including:

1. Potential reduction in the amount of cash distributions liable for income tax in a financial year.
2. Subjecting tax deferred amounts to Capital Gains Tax (CGT) rather than income tax, potentially reducing the total tax paid, based on marginal tax rates and individual circumstances.
3. Entitlement to concessional discounts on any capital gains made, based on the length of time the investment is held and the entity type that holds the investment. For example:
   • Individuals or trusts may be eligible for a 50% discount on capital gains if the 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 the investment is held for more than 12 months on capital account.
   • Superannuation funds in an allocated pension phase may enjoy tax-free capital gains. Additionally, gains realised on investments held prior to the allocated pension phase may also be tax-free.