Trusts vs Companies: What Investors Need to Know

Companies: An Overview

Dom notes company ownership for property is relatively uncommon and often dismissed outright by accountants, mainly because companies don't receive the 50% capital gains tax discount available to individuals. However, he explains companies have seen a bit of a resurgence as investors look for additional borrowing capacity once maxed out personally, and highlights an underappreciated benefit: companies can effectively defer tax by retaining profits rather than distributing them immediately, and can pay down debt faster than an individual, since a company only loses 30% of its income to tax before repaying a loan, compared to an individual at the top marginal rate losing closer to 47%.

Dom clarifies the two applicable company tax rates: 25% for active trading businesses, and 30% for larger companies or passive investment vehicles (such as a company simply holding rental property or receiving dividends, which counts as passive rather than active income).

How a Company Structure Works

Dom walks through the basic legal steps: appointing directors (who run the company but don't necessarily profit from it, and can face personal liability if things go wrong) and shareholders (who own the company via shares and receive any distributed profit, but bear little personal risk if the company fails). A company can then obtain its own bank loan, receive rental income directly, and pay its own expenses and loan repayments, entirely separate from the individuals involved.

What Is a Bucket Company?

Dom explains a "bucket company" is typically a non-trading entity sitting beneath a trust, used as a place to direct trust profits once all higher-priority beneficiaries are already on higher tax rates, capping the tax paid on that portion of profit at the 30% company rate rather than a higher individual marginal rate. He describes it as generally a last-resort option within a broader trust strategy.

Trusts: An Overview

Dom explains a trust is also a separate legal entity, but requires a trustee, ideally a corporate trustee (a company set up specifically to hold that role) rather than an individual trustee, which is now considered standard practice. This trustee company still requires its own directors and shareholders, but doesn't hold assets in its own right, it exists solely to administer the trust. A trust deed is the legal document defining the relationship between the trustee and the trust, including who the trust's beneficiaries are.

For a discretionary trust specifically, Dom explains a "main beneficiary" is nominated, with a broad surrounding pool of related beneficiaries (spouse, children, parents, grandparents, and so on) automatically eligible, giving flexibility each year to direct profit to whichever beneficiary makes the most tax sense at the time, rather than being locked into a fixed distribution arrangement.

How Income and Losses Work Within a Trust

Dom explains a trust itself doesn't pay tax, it functions as a distribution vehicle, deciding each year who among its eligible beneficiaries receives the profit (or manages the negative gearing shortfall). Importantly, a trust cannot distribute a loss the way an individual can claim negative gearing directly, any losses must be quarantined and carried forward within the trust itself, only offsetting future profit once the trust eventually turns positive.

Funding a Trust and the Interest Deduction Trap

Dom outlines how a trust can be funded (cash contributions from beneficiaries, equity release, or borrowing directly), and highlights an important trap: if an investor personally borrows money (for example, via an equity release) and simply contributes it to the trust outright, they lose the ability to claim a deduction on that borrowing themselves, since there's no guaranteed right to future income from a discretionary trust to justify the deduction. Instead, the correct approach is for the investor to on-lend the funds to the trust at a commercial interest rate, in which case the investor's own interest cost is offset by the interest the trust pays them back, and the deductible interest cost instead sits within the trust's own books, carried forward as a loss until the trust turns profitable. Dom notes this is a mistake he's seen a number of investors make in practice.

The Real Costs of a Trust

Dom outlines why trusts are the most expensive structure to establish: a company must be set up first (with no CGT discount available on its own), plus additional legal fees for the trust deed, plus state-based stamp duty specifically for establishing a trust (around $750 in New South Wales at the time of recording; Queensland currently charges none, a detail some investors take advantage of by setting up a Queensland-registered trust even if buying elsewhere). While a trust itself doesn't pay tax directly, the capital gains discount availability depends on which type of beneficiary ultimately receives the distributed gain, an individual beneficiary can still receive the 50% discount, since the trust simply passes the gain through.

When Does a Trust Actually Make Sense?

Dom notes trusts are most commonly set up once an investor has already maxed out their personal land tax threshold or borrowing serviceability, since a trust represents a fresh entity with its own serviceability and land tax position (though a trust pays land tax from the very first dollar, with no threshold, in New South Wales). He confirms the overwhelming majority of his clients still invest in their own name rather than through a trust, and is candid that he's personally talked clients out of setting up a trust on multiple occasions once it became clear the structure didn't suit their actual circumstances, since it can lock up losses for years with no immediate tax benefit if not genuinely needed. Dom also flags a specific limitation for trusts distributing to minors: children under 18 can only receive up to $416 in trust distributions before being taxed at penalty (top marginal) rates, making trusts of limited use for young children specifically, though far more useful once beneficiaries turn 18 and are on genuinely lower incomes (such as a student or part-time worker) than the primary income earners in the family.

Worked Example: Company Structure

Using a consistent modelling format from the previous episode (two-year intervals, a $500,000 property, 80% LVR, 5% annual growth, interest-only), Dom shows a company investment starting negatively geared (around $9,000 in the first two-year period, tapering down and turning positive by around year 8), requiring a total of $12,500 in cumulative cash injections over 10 years before eventually turning cash flow positive. Selling at year 10 for $805,000, after paying off the $400,000 loan, the company faces a capital gain of $305,000 with no CGT discount, taxed at 30% (a company tax bill of around $91,000), leaving after-tax sale proceeds of $313,000. After deducting the $12,500 fed into the structure over the holding period, the company nets around $301,000 after tax over the 10-year period.

Worked Example: Trust Structure

Using the same underlying assumptions, but now including land tax (1.6% in NSW, adding roughly $4,000–$5,000 a year), Dom shows the trust structure requiring a much larger cumulative cash injection of $92,000 over the same 10 years, since negative gearing losses provide no immediate tax benefit within a trust (they can only offset future trust income, not be distributed as a deduction), and land tax adds a substantial, unavoidable extra cost throughout the holding period.

At sale (again $805,000, same $400,000 loan payout), the $305,000 capital gain is first offset by the trust's $92,000 in carried-forward losses, reducing the taxable distribution to $213,000. Assuming this is distributed to beneficiaries on a low marginal tax rate (18%), the resulting tax is around $19,000, leaving after-tax proceeds of $294,000, comparable to the company outcome. However, if instead distributed to beneficiaries already on the top marginal tax rate (47%, for example, if surrounded by high-income family members with no lower-taxed beneficiaries available), the after-tax result drops to just $263,000, around $38,000 worse than the company structure in this specific scenario.

The Takeaway From the Worked Example

Dom's key point: in a scenario without genuinely lower-taxed beneficiaries available to receive the eventual distribution, a trust can actually leave an investor meaningfully worse off than a much simpler company structure, despite trusts often being recommended as the more tax-effective, "sophisticated" choice. His consistent advice: talk to a tax accountant before committing to a trust structure, since the right answer depends entirely on individual circumstances, particularly whether genuinely lower-income beneficiaries exist to receive future distributions.

Have the Rules Around Trusts Changed Over Time?

Jeremy, reflecting on trusts being commonly recommended when he was a newer investor, asks whether trust rules have become less favourable over the years. Dom explains recent ATO scrutiny has focused mainly on active businesses attempting to redirect profit generated by one person's labour to a lower-taxed family member, which the ATO views unfavourably. Passive investment structures like a property-holding trust, by contrast, remain straightforward and well-established, since the trust genuinely is built to hold and distribute passive income across a family group.

Asset Protection

Damien raises asset protection as a further consideration: holding property within a company or trust structure creates legal separation from an individual's personal assets, which can matter for people in higher-liability professions. Dom notes that personal liability risk (citing an example as simple as a late BAS lodgement triggering a director penalty notice) is broader than many investors realise, making that separation a genuine, if secondary, benefit of using a company or trust structure beyond the tax considerations already discussed.