For many investors, one of the most compelling aspects of property funds is the ability to receive regular passive income. What’s less well-known is that this income may also come with a valuable tax benefit – one that can improve cash flow now and reduce your tax bill later. This is called tax-deferred income, and it’s an important benefit to understand when comparing investment opportunities.
What is tax-deferred income?
When a commercial property fund distributes earnings to investors, some of that income may be classified as ‘tax-deferred.’ That means it isn’t included in your taxable income for the year you received the funds but instead, a portion of the tax is deferred until you sell your investment.
This happens because commercial property funds often claim non-cash deductions like depreciation, borrowing expenses and construction write-offs. These reduce the fund’s taxable income, but not the actual cash available to distribute to investors. The difference becomes a tax-deferred component of your distribution.
In short: you still receive the cash, but don’t pay tax on that portion just yet.
Why it matters to investors
There are two key benefits:
- Better after-tax cash flow
Because the tax-deferred portion doesn’t count toward your annual income, you’ll pay less tax this year, which means more money in your pocket. - Potential Capital Gains Tax (CGT) discounts
Tax is generally paid later, when you sell your units – but if you hold the investment for 12 months or more, you may be eligible for a 50% CGT discount (or 33% if held in superannuation).
In some cases, investors using Self-Managed Super Funds (SMSFs) in pension phase may even pay zero tax on tax-deferred distributions or CGT.
As always, individual outcomes vary, and it’s important to speak to your tax advisor for tailored advice.
A smart bonus, not a decision driver
We believe tax should never be the main driver behind an investment. However, when combined with the strong, stable returns of a well-managed commercial property fund, tax-deferred income becomes a powerful way to maximise your wealth over time.
