Joseph and Melanie are both highly successful surgeons, which not only comes with financial rewards but also significant risks, especially the risk of litigation. As they look to invest in property, their primary goals are twofold: protect their assets from potential legal claims and optimise their tax position. With their high incomes, they are particularly interested in using negative gearing to reduce their taxable income. To achieve these objectives, Joseph and Melanie can use a unit trust structure to purchase their investment property. In this blog, we’ll explore how a unit trust can offer both asset protection and tax efficiency, making it an ideal solution for high-income professionals.

The Challenge: Protecting Assets While Maximising Tax Benefits

As medical professionals, Joseph and Melanie understand the importance of protecting their wealth. Their profession, while lucrative, exposes them to the risk of legal action, which could potentially impact their personal assets. They are keen to invest in property as a means of building wealth and diversifying their income but want to do so in a way that shields the investment from potential litigation.

In addition, being high-income earners, Joseph and Melanie are subject to high marginal tax rates. They are looking for a tax-effective way to reduce their taxable income, and negative gearing offers a solution. Negative gearing allows them to offset the interest and other costs of the investment property against their income, thereby lowering their tax liability. Finding a structure that combines asset protection with the ability to leverage negative gearing is crucial for their investment strategy.

The Solution: Establishing a Unit Trust for Property Investment

To meet their asset protection and tax efficiency goals, Joseph and Melanie can establish a unit trust to hold their investment property. Here’s how this strategy works and the benefits it provides:

1. Creating a Unit Trust with Equal Ownership:
   Joseph and Melanie set up a unit trust, each holding equal units (50/50). By doing so, they become equal unitholders in the trust. The unit trust is then used to purchase the investment property. This setup means that the property is owned by the trust, not directly by Joseph and Melanie, providing a layer of legal separation.
2. Asset Protection Through the Unit Trust:
   By holding the property within a unit trust, Joseph and Melanie effectively protect it from potential legal claims. In the event of litigation, the property would not be considered part of their personal assets. Since the trust is a separate legal entity, any claims against Joseph or Melanie personally are less likely to affect the property owned by the trust. This separation helps safeguard their investment from the risks associated with their professional careers.
3. Fixed Entitlements to Income and Capital:
   In a unit trust, the entitlement to income and capital is fixed according to the number of units held. With Joseph and Melanie each holding 50% of the units, they are entitled to 50% of the income and any capital gains generated by the property. This clear and fixed entitlement ensures that profits are shared equally, reflecting their equal investment in the trust.
4. Leveraging Negative Gearing:
   One of the main benefits of using a unit trust for property investment is the ability to leverage negative gearing. When the costs associated with the investment property (such as interest on loans, maintenance, and other expenses) exceed the rental income, Joseph and Melanie can use these losses to offset their other taxable income. By reducing their taxable income, they can lower their overall tax liability, making their investment more tax-efficient. This is particularly advantageous for high-income earners like Joseph and Melanie, as it helps them manage their tax obligations while building their property portfolio.

Key Considerations for Using a Unit Trust

While using a unit trust provides significant benefits, Joseph and Melanie should keep the following in mind to ensure the trust is set up and managed effectively:

• Legal and Tax Advice: Setting up a unit trust involves legal, tax, and administrative considerations. Joseph and Melanie should work with legal and financial professionals to ensure the trust is structured correctly, complies with all relevant regulations, and aligns with their investment and financial goals.
• Trust Deed: The trust deed is a critical document that outlines the rules of the trust, including the rights and obligations of the unitholders, distribution of income, and management of the trust. Ensuring that the deed is drafted clearly and accurately is essential for the smooth operation of the trust.
• Ongoing Compliance: Managing a unit trust requires attention to record-keeping, tax reporting, and compliance with legal obligations. Joseph and Melanie should ensure that the trust operates transparently and that all income, expenses, and distributions are properly documented.

The Benefits: A Balanced Approach to Investment

By using a unit trust, Joseph and Melanie can achieve a balanced approach to their property investment strategy, combining asset protection with tax efficiency:

• Enhanced Asset Protection: The unit trust provides a legal separation between Joseph and Melanie’s personal assets and the investment property, reducing the risk of losing the property in the event of personal litigation.
• Tax Efficiency Through Negative Gearing: The ability to utilise negative gearing allows Joseph and Melanie to offset their high taxable income, reducing their overall tax burden and enhancing the financial returns from their investment.
• Clarity and Equal Entitlements: The fixed entitlements in a unit trust provide clear ownership and income distribution rights, ensuring that both Joseph and Melanie benefit equally from their investment.

Conclusion: Securing Wealth with Unit Trusts

For high-income professionals like Joseph and Melanie, protecting assets while optimising tax efficiency is crucial. By establishing a unit trust for their property investment, they can achieve both objectives. This strategy not only safeguards their investment from potential legal claims but also allows them to reduce their taxable income through negative gearing. With careful planning and the right structure, Joseph and Melanie can build a secure and profitable property portfolio that supports their long-term financial goals.

If you’re a professional looking to invest in property while protecting your assets and maximising tax benefits, consulting with legal and financial professionals about setting up a unit trust is a wise step. With the right advice, you can ensure that your investments are both safe and tax-efficient, securing a prosperous future for you and your family.