I get a lot of emails for unlisted property trust offerings, not because I’m interested in investing but because it provides an interesting economic pulse to monitor.
On Monday I was sent the investment overview for the Sentinel Airlie Beach Trust, which owns some portside assets on the Whitsunday Coast. I have no comment on the attractiveness of the investment and certainly won’t be investing myself. What I want to note is the yield claims made in the investment overview, which strike me as a little…uh…questionable.
The trust’s forecast 10.4% p.a. cash distribution is likely to be fully tax deferred for at least the first three years. The informational overview takes that distribution forecast and turns it into a claim of a ‘pre-tax return equivalent of 20.39% pa’ for unitholders on the highest marginal tax rate.
Bullshit, I say.
Fully tax deferred distributions are useful and valuable. It means an investor gets to defer tax on that cash stream until such time as the asset is sold, in this case most likely after the trust term expires in ‘up to 7 years’.
And for a lot of investors it effectively morphs income tax today into capital gains tax tomorrow, which can be advantageous because of the capital gains tax discount for assets held for more than one year. So 10.4% tax deferred beats 10.4% fully taxable as income this year, quite handily in some cases.
But is 10.4% tax deferred on a trust likely to last no more than 7 years the equivalent of a 20.39% pre-tax income stream taxable today?
No way. In the latter case, the highest tax rate investor will end up with 10.4% after income tax is paid. That same investor putting money in the Sentinel Airlie Beach Trust, assuming it all goes to plan, will end up with quite a bit less after all taxes are eventually paid on that income stream. Perhaps the only exception is someone on the highest marginal tax rate today but who is likely to be on a zero tax rate when the trust gets wound up, a small subset.
I’m surprised they got that one past their compliance committee, let alone their regulator.