Negative gearing through a trust
Negative gearing is one of the most popular tax strategies for individual property investors. But when property is held in a discretionary (family) trust, the mechanics of negative gearing change dramatically — and not in the investor's favour.
How trust losses work
If a discretionary trust runs a rental property at a net loss — because loan interest, management fees, and depreciation exceed rental income — that loss is a trust loss. Under the trust loss rules (Division 265 of the ITAA 1997), trust losses:
- Cannot be distributed to beneficiaries to reduce their personal income
- Are quarantined inside the trust
- Can only be used to offset future income generated by the trust itself
When trust property income can be distributed
If the trust's property generates a profit (rental income exceeds all deductions), that profit can be distributed flexibly among beneficiaries — and this is where the trust structure shines. You can distribute income to:
- Adult children in lower tax brackets
- A spouse earning less
- A company beneficiary (at 30% tax)
The interaction with proposed policy changes
Proposed changes to negative gearing rules would restrict established property investors from offsetting losses against non-rental income. For trust-owned properties, this restriction would not represent much of a change — trusts already cannot do this under existing law.
The bottom line on trusts
- Trusts are excellent for income splitting on profitable rental properties
- Trusts are not effective for negative gearing
- If your property will be negatively geared and you need those losses to reduce your salary income, a trust is the wrong structure