Best structure for property investment – family trust or SMSF?

For many years the family trust has been the preferred investment vehicle for people looking to build wealth through property – and rightly so.

However, with self managed super funds now able to borrow to invest in property via limited recourse loans, every property investor who currently has a family trust or who may be considering one needs to take another look at what is the most appropriate structure for their situation.


The following table compares the key differences between using a family trust (also know as a discretionary trust) and a self managed superannuation fund (SMSF):

Family TrustSMSF
Establishment costs (assuming a company as trustee)$1,500 to $3,000$3,500 to $7,000
(including instalment warrant / bare trust to enable borrowing)
Ongoing costs (assuming 1 x investment property)$500 to $1,200 per annum$1,500 to $3,000
Negative gearing benefits available to PAYG earnersNo. Income tax losses are trapped in the trust.Yes. Obtained by salary sacrifice.
Taxation on incomeDepends on the beneficiary – 0% to 45% plus 1.5% Medicare levyAccumulation members – 15%
Pension members (55+) – 0%
Capital gains – discount available if property owned for 12 months or more50% general discount if distributed to individual beneficiary33% general discount
Taxation of capital gainsDepends on the beneficiary – 0% to 45%Accumulation members – 10%
Pension members (55+) – 0%
Ability to borrowYes. No restrictions.Yes. Only via a limited recourse loan.
Typical level of gearing / borrowings availableUp to 80% with mortgage insurance depending on serviceability (residential property)Up to 80% for residential
Up to 65% for commercial
Varies by lender, property type and postcode
Redraws and borrowing against built up equity allowableYes.No. Property must be sold and the gain realised.
Property development allowableYes.Yes – provided the SMSF doesn’t breach the sole purpose test.
Professional advice will be needed. Multiple drawdowns not allowed.
Tax deduction available for property depositNo.Yes – via concessional super contributions such as SGC and salary sacrifice
Access to funds for personal / private useYes.Only available for members who have reach retirement age (55 +)
Do you have self control and the ability to keep your hands out of the ‘cookie jar’?No – then the family trust may be the better option!Yes – you should be OK with an SMSF!
Ability to take a loan from the trust / SMSFYes.No. Expressly prohibited.
Ability to re-invest profits / gains for further investmentYes.Yes.
Ease of saving for deposit for propertyMust be saved from after tax earnings.Current superannuation savings can be transferred into SMSF to act as the deposit for the property. And/or saved from before tax earnings.
Asset protection / bankruptcy protectionGood / strong – assuming that corporate trustee is used and director of corporate trustee has low ‘risk’ (via occupation or business dealings).

Beneficiary loans / unpaid distributions can be a problem.
Superb. Untouchable unless amounts are intentionally put into super to defraud creditors.
Estate planning / deathForms part of your estate. Can be fought over or challenged by potential beneficiaries.Not part of your estate unless trustees pay out benefits to your estate. Cannot be challenged when paid directly from the SMSF
Taxes on deathPotential CGT and stamp duty issues unless assets are dealt with promptly.No tax if benefits are paid to a ‘financial dependent’ (i.e. spouse, child under 18 or disabled child).
15% tax on ‘taxable component’ if paid to a non financial dependent (such as an adult child)
DivorceForms part of martial assets. Can be split as part of settlement.Forms part of martial assets. Can be split as part of settlement.
Flexibility to distribute income and capital gains in discretionary wayYes.Yes (assuming a good quality trust deed).
Enables families of different generations to invest togetherYes.Yes.
Control & voting rightsThe trustees (if individuals) or director(s) if a trustee company. Voting rights depends on number of shares and the rights attached to those sharesEach SMSF must be a trustee (or director of corporate trustee). Voting rights can per 1 vote per person or based on dollar value of members benefits (assuming a good quality trust deed).

The above table is not intended to be an exhaustive list of all the advantages and disadvantages of each structure.

You should highlight the key points in the table that are most important to you, your goals and needs and use those to base you decision.

If you are looking for maximum flexibility with the ability to redraw any money you invest as and when you please, then the family trust is probably the way to go.  Alternatively, if you don’t mind locking your investment monies away in the short term, then the SMSF is more likely to suit your needs.

Age is also an important factor when deciding whether a SMSF is for you (and your family).  If you are under age 40, then you may want to get one or both of you parents or your partner’s parents involved.  This will give you both the unparalleled tax benefits and the ability for some monies to be withdrawn tax free once the older members of the SMSF reach retirement age.

If you are over age 40 then you should be looking at your retirement income strategy in more detail and learning toward the SMSF option.

If you can’t decide – there is nothing stopping you doing both!

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