Property investment is a big step and can be very rewarding. However, to be able to maximise the benefits from the investment, you would need to buy the property within the right business structure. Instinctively, you might use a company structure but the best structure for your property investment largely depends on the situation.
The most common property investment structures are one in your personal name, jointly with an individual, within a unit trust, within a discretionary family trust, within a company and as part of your SMSF. Find out which structure is best for your property investment.
Tax structure for investment property
If you use your name for property investment, you would have minimal compliance obligations, no setup costs, access to negative gearing if you take out a loan and to 50% CGT discount if you held the property for over 12 months. However, income from the property will be taxed at marginal tax rates and can reach 47% if Medicare levy is included. There will also be little or no asset protection in case of financial or legal trouble and the income is fixed to the owner and can’t be split. This is best for first time property investors who want to take minimal risks and take advantage of negative gearing.
If you invest jointly with another person, you will have minimal obligations and no set up costs. You will also have access to negative gearing and the 50% CGT discount. Income can be split between the investors based on your percentage of holding. However, income will be taxed at marginal tax rates and it offers little or no asset protection in case you or your partner get into financial or legal trouble. Income is fixed to the owners and can only be split in accordance with ownership percentage. This is also most suited for first time property investors.
Keep in mind that the distinction of Joint Tenants vs Tenants in Common should be addressed before you sign papers. “Joint Tenants” concerns ownership where each party has an interest in the property. The Right of Ownership means that in case of the death of one partner, the ownership is automatically transferred to the other partner. “Tenant in Common” is where each party is a co-owner but there is no Right of Ownership. In case of death, the share goes to their estate and not the partner.
One common type of trust structure used to hold assets is a discretionary family trust. The trustee will hold the assets for the beneficiaries, distribute them at a percentage of the full amount at the beneficiaries’ discretion.
If you want to invest property within a discretionary family trust, you can minimise tax by streaming income to beneficiaries tax effectively. It provides limited liability because the property investment is not owned by the beneficiaries but by the trust. You can enjoy more liability protection if the trustee is a company. It allows for streamlined estate and succession planning so the property investment can be easily passed on to future generations. You can also access the 50% CGT discount.
However, detailed annual financial compliance is required and financial statements and tax returned should be lodged. You will pay a fee to set up your trust along with other ongoing compliance costs. There is no fixed interest in the property for individuals and any losses incurred will be trapped within the trust until offset by profit. You won’t be able to take advantage of negative gearing as well.
This may be best for high income earners who have access to people on lower tax brackets so profits can be distributed more tax effectively. The limited liability protects the assets in case the individual gets into financial or legal trouble.
A unit trust is a structure where beneficiaries have a fixed interest in the trust’s assets which are held by the trust for the unitholders. If you want to invest your property within a unit trust, you will have a fixed interest. The structure provides limited liability especially if the trustee is a company. You will have greater control in estate and succession and access to the 50% CGT discount.
However, you will be required to lodge detailed financial statements and tax returns annually. You will pay a fee to set up the unit trust plus ongoing compliance costs and losses remain in the trust until offset by profit. You won’t be able to access negative gearing and income is fixed to the unitholders and must be split according to ownership percentage of units held. It is best for unrelated individuals looking at a fixed interest. Just like a discretionary trust, it protects the assets.
If you’re looking to use a company structure for your property, you will follow company tax rates which is currently capped at 26%. Profits can accumulate until a tax effective time to pay them out. Any tax can be passed to shareholders via franked dividends. The company also owns the assets, limiting liability and protecting assets.
However, companies cannot access negative gearing nor the 50% capital gains tax discount. The company needs to prepare detailed financial statements and tax returns every year. You would need to pay set up fees and compliance costs and losses remain in the company until offset by profit as well. It is best for high income individuals who want to minimise their tax.
If you want to invest your property in an SMSF, income within the SMSF is capped at 15%. SMSFs are also eligible for a 30% CGT discount and if you bought the purchase while in pension phase, income is tax free provided balance is below $ 1.6m. Capital growth will also be there for retirement. However, any benefits from the investment can’t be accessed until preservation age or retirement. You also cannot use the property for personal use before retirement. You would need to complete thorough financial statements and tax returns each year and pay set up fees and compliance costs. SMSF rules are complex so you would need to understand how you can maximise your SMSF. This is for those who want to save for retirement and do not have immediate need to sell or access the income.
There is no one best structure for your property investment but you need to look at your needs and goals so you can choose the most appropriate for you.
As you look for different ways to grow and improve your business, seeking professional advice could prove to be an important and helpful decision.
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