Instinctively, you might choose a company structure for your property investment but it may not be the best structure for your property investment. The most common property investment structures are in personal name, jointly owned with another individual, discretionary family trust, unit trust, company and SMSF.
Business structure for property investment
If you use your personal name for your property investment, you’ll have minimal obligations, no setup costs and access to negative gearing and 50% CGT discount. However, it will be taxed at marginal rates and offer no asset protection. You can’t split the income as well. This is suitable to first-time property investors. Same goes for investing jointly with another person except that you can split income between both investors according to the percentage of ownership. When investing in property with another individual, know the difference between joint tenants and tenants in common.
If you invest in property within a discretionary family trust, the trustee holds assets for the beneficiaries and distributes income at a percentage at their discretion. This is tax-effective and offer limited liability, streamlined estate and succession planning and access to the 50% CGT discount. However, annual financial compliance and comprehensive tax returns and financial statements are required with several setup costs. Losses are trapped until offset by profits and cannot be negatively geared. This is most suitable to high income earners and those with risk attached to their name.
If you invest in property within a unit trust, it’s almost the same as the discretionary trust except that each unitholder has a fixed interest in the investment and income is split in accordance with ownership percentage. It is most suitable to unrelated individuals who want to own an investment property together.
If you use a company structure to invest in property, you’ll follow company tax rates. Profits can also accumulate in the company until it’s tax-effective to take them out. Any company tax can be passed to shareholders through franked dividends. It also offers limited liability and good asset protection. Companies cannot access the 50% CGT discount though and have the same cons as the trusts. It is most suitable to high-income individuals.
If you invest in property in an SMSF, any income will be taxed at 15% with 30% CGT discount. If the property is purchased while the SMSF is in pension phase, income will be tax-free. There is capital growth for retirement as well. You won’t know the benefits until you reach preservation age or retirement and can’t use the property for personal use until you retire. You need to lodge tax returns and financial statements and pay setup costs. SMSF rules are also complex. It is most suitable to those looking to save for retirement.
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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