PROTECTING YOUR INVESTMENTS AND SAVING YOU TAX IS PAR FOR THE COURSE.

While we can point people in the right direction, we always recommend that our clients seek advice from their solicitor, accountant and finance broker or lender who will all provide advice from a different perspective.

A solicitor will consider asset protection, an accountant the taxation advantages (and can also help with asset protection), your mortgage broker or lender the types of finance and costs associated with each.

You must remember that there is no right answer for everyone. There are many different options to choose from, based on personal circumstances.

The keys issues to think about are:

·         Asset Protection

·         Taxation Issues

·         Costs & Complexity

The most common structures are:

·         Individual

·         Partnership

·         Company

·         Trust

·         Self-Managed Superannuation Fund (SMSF)

Individual

An individual is a separate legal entity at law. Owning an investment property under an individual’s own name is the simplest and cheapest option available in Australia. This structure does not offer any asset protection to the investor but any negative gearing losses generated from the property investment may be used to offset their personal income.

Partnership

Purchasing with a partner or spouse is the most popular way to buy an investment property. When you are buying an investment property you can stipulate the percentage of ownership which helps couples or partners in different tax brackets achieve optimal tax savings.

This partnership can include anyone you wish but worth remembering that partners are joint and severally liable for the debt, so best done with partners or family members.

As with individual ownership, if the property is sold and a capital gain is made, the property investor can take advantage of the 50% CGT discount if the property has been held for at least 12 months before it is sold.

Company

A company is a separate legal entity. In general, this means that if the individual gets sued, the property will not be at risk because it is legally owned by the company, not the individual. However, if an individual owns all the shares of a company that owns the investment property, the company shares would be at risk if the individual gets sued.

The rental income received by the company will be taxed at the corporate tax rate, substantially lower than the individual tax rate. However, any negative gearing loss incurred by the company will be confined inside the company and will need to be carried forward to offset against the company’s future income. When the property is sold and a capital gain is made, a company cannot claim the 50% CGT discount on any capital gain derived, which can make a big difference to the return on your investment.

Trust

A trust is a not separate legal entity. A trust is a relationship where a person (the trustee) is under an obligation to hold property for the benefit of other persons (the beneficiaries). The trust deed defines the relationship between the trustee and the beneficiaries.

A discretionary trust (also known as a family trust) may provide reasonably effective asset protection as the beneficiaries of the trust are generally not presently entitled to the income or capital of the trust until the trustee makes a resolution to distribute the income or capital to them.

For tax purposes, a discretionary trust generally provides maximum flexibility in dealing with the net rental income of the trust as the trustee of the trust has the discretion to distribute different amounts of income to different beneficiaries. Depending on the trust deed, a similar flexibility may also apply to the distribution of any capital gain to the beneficiaries.

A trust can take advantage of the 50% CGT discount, meaning that if the trust makes a capital gain and has held the property for at least 12 months, the trust can claim the 50% CGT discount if the capital gain is distributed to an individual or another trust.

However, as with a company, any negative gearing loss generated from a property owned by a trust is stuck in the trust, unless the trust has other income to offset the loss.

SMSF

Borrowing to buy property through an SMSF is achieved through a limited recourse borrowing arrangement (LRBA). To 'limit the recourse' of the lender, a separate property trust and trustee is established to hold the property on behalf of the super fund, outside the actual SMSF structure. All the income and expenses of the property go through the super fund's bank account.

The super fund must meet all loan repayments. If the super fund fails to do this, the lender only has the property held in the separate trust as recourse and cannot access any remaining assets of the super fund.

The lending criteria for an SMSF is generally much stricter than a normal property loan that you might take out as an individual. You will need a higher deposit and pay a higher interest rate and then there is a cost for annual reporting. which all needs to be factored in when working out if the investment is worthwhile.

If you buy a property through an SMSF, the fund is required to pay 15% tax on rental income from the property. On the plus side for properties held for longer than 12 months, the fund receives a one third discount on any capital gain it makes upon sale, bringing any capital gains tax liability down to 10%.

If the property is purchased via a loan, the interest payments are tax deductible to the fund. Additionally, if expenses exceed income there is a taxable loss that is carried forward each year and can be offset within your SMSF’s future taxable income.

Once trustees start receiving a pension at retirement, any rental income or capital gains arising in the fund become tax free, making this an attractive option for investors.

Many of our more experienced investors have property within and out of their SMSF’s to gain the maximum performance available to their personal circumstances.

Disclaimer

This information is offered as general information only and should not be relied on for investment structures in Australia. It only touches on the subject matter and does not cover all the federal and state taxes that may apply to property investments in Australia.

We always recommend that you seek advice from qualified and licenced professionals. If you need help we have a great network of experience professionals in each city and are only happy to make recommendation.