The biggest decision a property investor has to make once they have found a property and want to purchase it is: “whose name should I put the property in?” This decision could cost or save you thousands of dollars so it requires your attention.
I have listed below the most popular options (non-exhaustive) to assist you in making this decision but I highly recommend before you sign a contract that you speak to a specialised property accountant to guide you through the process.
The obvious first thought is to buy the property in the individual’s name. This is the simplest and easiest option. However, you must also consider the following when making this decision:
If you’re married, who is the highest income earner? If the property is negatively geared, the person on the highest income will receive the greatest tax benefit and that could amount to a significant sum over a lifetime of holding a property. Also, if the property is sold, any capital gain will be taxed in this person’s name.
Have you breached your land tax threshold in your individual name in that state? If you have, you may want to consider purchasing the next property in a different entity that gives you another land tax threshold. Remember that land tax is a state by state impost.
If you are working in an industry that is highly litigious, you may want to consider not holding assets in your personal name. Even though initially, the equity will be minimal if you have borrowed money, overtime this equity will grow and that will be exposed if you are sued in your normal course of business.
How will the property be dealt with on your death? If you want to pass down to children, you will need a very well thought out Will so you don’t leave problems for others. Another modern day issue is divorce and second marriages.
These need to be dealt with via well thought out Wills and agreements.In saying that it’s normally irrelevant, what structures you hold assets in as the Family Law courts have a wide-ranging power that generally sees through structures, holding assets to ensure equitable splits.
Joint ownership is another common ownership and you must consider points 1 to 4 above. One advantage of Joint ownership is that over time, the property will produce a positive return and the income can be split between the two individuals. Also on sale, if there is a capital gain, this to can be split, minimising the tax that would need to be paid.
A company is deemed a separate legal entity and therefore receives all the benefits of a separate entity. A company will receive a separate Land tax threshold, thus you can have multiple companies to receive multiple thresholds. However, the cost of administering a company is expensive. A company has a different tax rate and the treatment of this is a little more complex.
Any borrowings would generally sit inside the company and the losses would be trapped inside the entity. This means you may miss out on the tax benefits of negative gearing, although with some strategic tax planning, this may be alleviated.
Another issue is if you sold the property for a significant capital gain, down the track you will pay normal company tax at the current rate of 30%, whereas outside, you get the Capital gain discount of 50%. This could mean the tax you would pay could be less.
However, the cash that flows from the sale after repayment of loans and tax is paid to the shareholders in the form of a Franked dividend. This means the shareholder receives a benefit for the 30% company tax against their income.
Because it is a separate legal entity, the asset is somewhat protected if you get sued as an individual, subject to the structure of the shareholdings of your company because a share in a company is an asset.
A very Popular form of property ownership is via a Trust structure because a trust can give you most of the benefits required and the flexibility to make changes if your life changes without incurring significant transactional costs.
There are various types of trusts but the most common are Discretionary Trusts, Hybrid Trusts, Unit Trusts and Property Investors Trust ™. One of the most common forms of trusts for property ownership is a “Property Investors Trust.”
A Property Investors trust has a tax ruling from the Australian Taxation Office, which provides the flexibility so you can receive the tax benefits as if it was owned in your own individual name but also the asset protection and estate planning benefits if you want to pass the property onto future generations and in particular No Vesting date.
For example, did you know that after 80 years, a standard trust vests? In practical terms, it means that this will trigger stamp duties and Capital gains taxes as if the property was sold even though it is not. You may say that is too far away but we have seen this with clients numerous times.
A trust must have a trustee which can be either an individual or individuals or a corporation to act on behalf of the trust. The treatment of Trusts for land tax varies from state to state. Some states provide a separate threshold while others, in particular, NSW, do not give a land tax threshold to most trusts, an exception being a Fixed Property Trust.
The establishment and ongoing costs of holding property in a trust are higher than the above 3 options so you need to weigh up the cost versus benefits for you.
As you can see, it is not a simple answer to the question “Who’s name should I buy my next Investment property in?” My strong recommendation is to speak to a specialist Property Accountant before you sign or exchange contracts.
This accountant will sit with you analyse your particular situation and then give you the options, taking into account Income Tax, Asset Protection, Land Tax, Estate planning issues and the costs associated with these so you can make a well-informed decision. This meeting could save you literally hundreds of thousands of a lifetime of a property.
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