If you are a Small Business owner then you should seriously consider purchasing your residential or commercial investment property in a Property Investors Trust.
Some of the Questions you may be asking:
- What is the best entity to own a property in?
- There are many Trusts out there so what is the true meaning of a Trust?
- What is the main idea of a Trust?
- Why is a Trust so important?
- What is a property trust in Australia?
- What are the benefits of buying a property in property trusts?
- How does a property unit trust work ?
- How does a property investment fund work?
What is a property trust?
A property trust is a fund where an investment manager invests in a range of properties – commercial, residential, buildings, or other properties. A property trust may be listed, meaning it is traded in the Australian Securities Exchange, or unlisted, meaning they are privately held.
Knowing this helps small business owners understand the advantages versus disadvantages of the available structures to hold investment property assets.
Individual Names (Sole ownership or in joint Partnership)
- Cost effective and simple for property investments
- Generally easier to borrow funds as long as your business income meets the Bank’s minimum income range on lending for property investments
- Gets a full land tax threshold in most States of Australia for properties of all types
- Negative Gearing can be offset against the owners other income
- Inflexibility. It’s very expensive to change the ownership name of the property to meet one’s changing circumstances due to the property being deemed sold at its market value hence Capital Gains tax and stamp duty costs
- No Asset Protection measures for those who are in a high risk occupation or Small Business Owners whose assets are commonly exposed to litigants
- One will find it impossible to pass properties to children without incurring stamp duty and capital gains tax during the life time of property ownership, unless one dies and leaves their property to children via the WILL
- Once land tax threshold is exceeded the full land tax premium is payable on the excess of land value of non owner occupied properties until sold
- If the property is held in the name of husband and wife, it is deemed as a Partnership and is only entitled to a single set of land tax threshold, thus losing the 2nd set of threshold the two individuals could have otherwise got for their properties
- If held between two individuals (in Partnership) they are each held jointly and severally liable to the wrong doings of the other partner
Conclusion: the disadvantages outweigh the advantages especially when someone owns a small business
Companies (a separate legal entity and perpetual in nature)
- Can provide some level of asset protection for your property as long as the Directors are not the shareholder as well
- Franked dividends allows the tax paid by the company to be streamed to the shareholder giving many tax planning opportunities
- Easier to borrow funds compared to Hybrid Trusts when it comes to property loans
- Perpetuity as its relatively easier to simply appoint a Director
- Gets a separate land tax threshold in most States for property
- The loss of the 50% Capital Gains Tax Exemption from sale of investment assets such as the property
- Extra maintenance costs such as ASIC annual fees and higher accounting costs etc
- Needs to pay tax first before it can stream Franking Credits to shareholders
- A little more complicated and costs upon sale of the property and winding up the structure
Conclusion: only in very special circumstances should one buy a property in a Company
Discretionary Trusts (or Family Trusts)
- If the property is positively geared the Family Trust can distribute the rent to a beneficiary on the lowest tax bracket.
- It’s flexible and can generally change the distribution each year at the discretion of the Trustee
- Protect assets better as the property is not held in the beneficiaries name.
- Easily understood by the banks and banks readily lend money to it
- Does not trigger an E4 CGT Event
- The profits from a Small Business that’s held in a Family Trust can be distributed to the loss making property that’s held in a different Family Trust
- If the property is negatively geared, the losses are trapped within the Family Trust and cannot be distributed to a beneficiary
- There is no land tax threshold or a reduced land tax threshold in major States so pays higher land tax on the property
- Subject to a 80 year Vesting Date which triggers capital gains tax and stamp duty when the property vests
Conclusion: only when property is positively geared and there is a need for asset protection should one invest a property in a Discretionary Trust
Unit Trusts (there are Fixed Entitlements)
- If the property is negatively geared, the beneficiary can claim the losses against his/her own wages if properly set up.
- More flexibility and can change the distributions by redeeming and issuing new units after considering taxes and costs
- Easily understood by the banks and banks readily lend money to a Unit Trust that owns property
- Some States provide benefit of a land Tax Threshold but others only allow it to “Fixed Trusts”
- If not structured properly the losses from negative gearing can be trapped within the Unit Trust
- Has no land tax threshold or a reduced land tax threshold in some States so, pays higher land tax
- No asset protection if the units are held in the individual’s name
- Has a 80 year Vesting Date which could trigger capital gains tax and stamp duty when the property vests
- Can pay higher capital gains tax on the sale of the property due to E4 Event
Conclusion: only in certain circumstances should one buy a property in a Unit Trust
Hybrid Trusts (a combination of Discretionary and Unit Trusts)
- If the property is negatively geared the beneficiary can claim the losses against his/her own wages
- More flexibility and can change the distributions by redeeming and issuing new units as circumstances change after considering taxes and costs
- If not structured properly the losses from negatively geared property can be trapped within the Hybrid Trust
- Has no land tax threshold in some States so, pays higher land tax on the properties
- No asset protection if the units are held in the individual’s name
- Has a 80 year Vesting Date which could trigger capital gains tax and stamp duty on the vesting of the property
- ATO issued a Tax Ruling against the non commercial use of Hybrid Trusts
- Some banks will not lend to it despite holding the property as security
Conclusion: the ATO is not in favour of these Trusts and has actually issued a Tax Determination against them.
Self Managed Superannuation Fund (a Trust that is for Retirement purposes)
- Can rollover funds in an Industrial or Managed Fund to be used as a Deposit on a property thus providing more leverage
- Positive gearing will only be taxed at 15% and when in Pension Phase income is tax free if under $1.7 million (indexed to $1.9 million from 23/24)
- Easily understood by the banks and banks readily lend to it
- Gets a land Tax Threshold in most if not all States for property
- Subject to market conditions, banks have ceased lending to Superfunds from time to time
- If the property is negatively geared the losses are trapped within the Superfund and cannot be used to offset against the individual’s own wages
- Cannot access until retirement
- Has a 80 Year Vesting Date
Conclusion: there are distinct advantages in using a Self Managed Superannuation Fund to own a property in and should be part of the consideration especially if one is a Small Business Owner.
Property Investors Trust (designed from ground up for property investing)
- Provides Asset Protection in case of litigation from a creditor especially suited for Small Business owners and high risk individuals due to their occupation
- Allows Negative Gearing to be claimed in the individual and Businesses tax returns
- Has No Vesting date so it goes on in perpetuity
- It achieved an ATO Product Ruling in previous years and there are many thousands of them in the market place right now
- The issue and redemption of Units attracts no stamp duty in most States (except Queensland and potentially NSW)
- Provides a lot of flexibility to accommodate your changing circumstances without incurring a lot of costs
- Provides a lot more choices in regards to estate planning
- Does not trigger an E4 Event
- There is a “one off” cost to establish it which includes cost for a Corporate Trustee
- Could take a little longer to explain to some banks how it works
- There is no longer a land tax threshold for the Property Investors Trust
- The redemption and issuing of new Units may attract Capital Gains Tax
Conclusion: the Property Investors Trust was designed specifically for property investing and the advantages far outweigh the disadvantages especially when someone owns a small business and should be a serious part of one’s consideration in deciding the ideal structure to use
Why Property Investors Trust (PIT™)?
Whilst the Property Investors Trust (PIT™) has lost a couple of benefits with current changes, such as a full land tax threshold and the Units must have a Capital component, it is still extremely flexible to accommodate one’s changing circumstances without the usual excessive costs.
It gives you so many more choices than any of the other structures. For example you can redeem Units and stream income to another individual tax effectively without incurring stamp duty in many States and after considering the net effect of capital gains tax versus savings in income tax.
Managing the loss of the land tax threshold can be achieved by buying the first property in an individuals name to take advantage of the land tax threshold with an “Equity Bank Trust “ for Asset Protection and once the land tax threshold has been utilised then purchase properties there after in the Property Investors Trust for the extra flexibility, advantages and choice.