Beneficiaries occupying Trust property?

Its not uncommon for people to live in a home owned by a family trust as beneficiaries of the trust.   There are different options available to the Trustees.  Each of the different options can have different tax consequences.  It is important to be aware of them and ensure that whichever option is chosen is documented by the Trustees and captured appropriately for tax purposes. 

Living-rent Free

Living rent-free as a beneficiary of the trust in a trust-owned property is a distribution of capital by the trust to the beneficiary unless the trust is either a foreign trust or non-complying trust.   If either of the latter applies, then this may result in a taxable distribution to the beneficiary.

Beneficiaries pay house costs

Home owner costs such as rates, insurance, body corporate fees and mortgage repayments are the liability of the property owner (eg the trust).  Where a beneficiary pays these costs on behalf of the trust, this results in these payments being a deemed rental payment.

As long as the corresponding costs are deductible to the trust then the deemed rent less the deductible costs results in nil taxable income for the trust.  If instead, some of the payments are for capital items, such as improvements or capital mortgage repayments the trust could end up with taxable income.    

It is possible to document the beneficiary payments as an advance from the beneficiary to the trust.  This stops the payments being deemed rent (income) to the trust. 

Charge market rent

Where a trust charges the beneficiary market rent, the market rent will be assessable income.  This can be offset by any deductible expenses.  Note that if the rent is less than market then the deductible expenditure is limited to the level of rent charged. 

If you are not sure what option is best for you, or you think that you may have missed declaring some trust income, contact us to discuss. 

Kirsten Rattray

March 21, 2023