A guide to tax-deferred distributions - Cromwell Funds Management
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June 1, 2023

A guide to tax-deferred distributions

Property real estate income funds can be an attractive investment for those people seeking a reliable source of regular income. Most of this income comes from rent earned on the fund’s underlying properties and, as rent is usually paid monthly, a property fund is able to pay distributions monthly or quarterly, which is an advantage for an investor’s personal cash flow. At times, some of the income from property funds may include a component of “tax-deferred distributions”.

Due to their complexity, however, tax-deferred distributions are rarely understood by anyone outside professional investor or tax specialist circles.


Tax-deferred distributions occur when a fund’s cash distributable income is higher than its net taxable income. This difference arises due to the trust’s ability to claim tax deductions for certain items – such as tax decline in value on plant and equipment; capital allowances on the building structure; interest and costs during construction or refurbishment periods; and the tax amortisation of the costs of raising equity.

In tax technical terms, tax-deferred amounts can give rise to distributions from property trusts of “other non-attributable amounts” for trusts that have elected to be Attribution Managed Investment Trusts (AMITs) and “tax deferred” components in non-AMITs – all referred to as tax-deferred distributions in this article.

Tax-deferred distributions are generally non-taxable when received by investors. Instead, these amounts are applied as a reduction to the tax cost base of the investor’s investment in the property fund, which is relevant when calculating any Capital Gains Tax (CGT) liability upon disposal of the investment units or once the tax cost base has been reduced to nil. Therefore, any tax liability in relation to these amounts is ‘deferred’, typically until the sale or redemption of an investor’s units in the fund when CGT may arise.

At its simplest, tax deferral works as follows: suppose a trust earns rental income of $100 and has building allowance deductions of $20. Then the net taxable income is $80, which is distributed to unitholders to be included in their taxable income. The remaining $20 of cash is distributed to the unitholders too, but for tax purposes it is regarded as a reduction in cost base of the units invested in the fund by the unitholder.

So long as the accumulated tax-deferred income is less than the investor’s acquisition cost, the tax is generally able to be deferred. If tax-deferred amounts have reduced the cost base to zero – that is, if the investor has received total tax-deferred distributions at least equal to the original cost of the investment – then any excess must be declared as a capital gain in the year it is received.

Capital gains are distributed by a trust only when the trust sells capital assets at a tax profit. These gains are then subject to tax in the investor’s hands, the same as other gains. Alternatively, investors are taxed on any capital gains, including any accumulated tax-deferred distributions, when they dispose of their units in a trust or the trust is wound up.


An incidental benefit of tax-deferred distributions for investors is the ‘deferral’ of tax until a CGT event, such as when the sale of your units or the wind-up of the trust, triggers a CGT liability.


Tax-deferred distributions reduce the investor’s cost base for CGT purposes, thereby increasing the CGT gain upon realisation. If the investor holds the units for more than twelve months, they may be able to significantly reduce the tax payable by applying the 50% discount for individuals, or by the one-third discount for superannuation funds.


Tax-deferred distributions may also be reinvested until such time as a CGT event occurs. The compounding benefit from reinvesting these distributions can be significant over time.

Case Study

The case study below shows the effect of tax-deferred distributions for an investor on the top marginal tax rate (assumed to be 45%). The case study compares a hypothetical $100,000 investment into an interest-paying investment earning 5% per annum with a property investment paying 5% distributions.



As you can see, an investor on a marginal tax rate of 45% and entitled to a 50% CGT discount makes a tax saving of $3,375.


Assumptions used in the case study:

  • An individual investor invests $100,000 into XYZ Investment (for example, an unlisted property trust) in Year 1 at a cost of $1.00 per unit (XYZ Investment).
  • The XYZ Investment is redeemed in Year 4 (i.e., after three years) at a unit price of $1.00.
    No allowance has been made for any potential capital gain or loss from unit price increases or decreases during the period the investment is held. This would also have CGT implications.
  • Distributions from XYZ Investment are 100% tax-deferred for the full period of the investment (in order to illustrate the potential savings).
  • XYZ Investment distributes 5.0 cents per unit, per annum.
  • The investor does not have any capital losses available to offset gains.




1. Capital gain = $100,000 capital redemption, less reduced cost base of $85,000 ($100,000 initial investment less $15,000 tax-deferred distributions = $85,000) = $15,000 capital gain. Tax payable = $15,000 x 45% x 50% = $3,375. The tax payable does not take into consideration any Medicare Levy surcharge.

This article has been prepared by Cromwell Funds Management Limited ABN 63 114 782 777 AFSL 333214 (CFM). The above information has been prepared for general information only and should not be relied upon as tax advice. This information should be read in conjunction with the Australian Taxation Office’s (ATO) instructions and publications. An investment in a property fund can give rise to complex tax issues and each investor’s particular circumstances will be different. As such we recommend, before taking any action based on this article, that you consult your professional tax adviser for specific advice in relation to the tax implications. This document does not constitute financial product or investment advice, and in particular, it is not intended to influence you in making decisions in relation to financial products. While every effort is made to provide accurate and complete information, Cromwell Property Group does not warrant or represent that this information is free of errors or omissions or is suitable for your intended use and personal circumstances. Subject to any terms implied by law which cannot be excluded, Cromwell Property Group accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrepresentation in the information provided.

About Cromwell Direct Property Fund

Read more about Cromwell Direct Property Fund, including where to locate the product disclosure statement (PDS) and target market determination (TMD). Investors should consider the PDS in deciding whether to acquire, or to continue to hold units in the Fund.