Using the right ownership structure for your investment property
could make a huge difference when it comes to risk and tax.
Hey everyone, Kim Quach from Duo Tax,
here for another video designed to help you become a better property investor.
Choosing how to structure your investment property’s ownership
is super important when aligning your goals with your investment strategy.
This is because each ownership type offers different levels of asset protection
and tax benefits.
Now, there’s no one-size-fits-all solution when it comes to purchasing
your investment property, but in this video,
I want to explain all your available options so that you have all the facts before figuring
out what the most appropriate structure is for your investment.
So, stay tuned!
Before we get started, we want to be clear that this video is for informational purposes.
In no way should you interpret this as financial or investment advice.
We always recommend working with a qualified financial advisor or tax agent
to give you the best advice for your situation.
Alright, let’s jump straight in.
The first and most obvious ownership structure is personal ownership.
Individual or personal ownership is probably the easiest to understand because, essentially,
it just means that you own the property in your personal name.
There are quite a few tax benefits if you go this route because the ATO allows you to claim
a pretty long list of deductions like interest on your loan, rental expenses and depreciation.
This means you can deduct these expenses
from the rental income you generate so that you can minimise your individual tax bill.
And if you decide to go with a negative gearing strategy, the ATO allows
you to deduct that loss from your overall taxable income - not just your rental income.
Unfortunately, though, this is the one ownership structure that offers the least asset protection.
There’s also no option for sharing the tax burden with your family members
as there would be in some of the other structures we’re going to discuss.
So, limited asset protection versus an increased
tax benefit is the trade-off when buying property in your own name.
The second ownership structure is joint ownership.
Just like the name suggests, this is when more than one person purchases the property.
So, for example, you and your sibling decide to buy the property together.
How you structure your joint property agreement
can significantly impact your tax obligations and asset distribution.
So there are generally two different ways you can structure your agreement.
The first would be tenants in common.
Tenants in common share interest in the property,
and that interest gets distributed according to their will.
It doesn’t necessarily have to be interest in equal shares; it could be a 60/40 split.
But this vested interest doesn't necessarily dictate how the property can be used and enjoyed.
For example,
let’s say Bob and Lisa purchased an investment property together for $420,000.
Lisa could pay $294,000 towards the purchase price,
and Bob could contribute $126,000
So, according to the agreement, Lisa owns 70% of the property, and Bob owns 30%.
But just because Lisa paid more towards the property price and has a bigger share in the
profits drawn, her and Bob both share an equal right to use the entire property.
So, if they were to eventually change its use to be a holiday home and not an investment property,
they could visit the property on equal terms.
Joint tenancy is the other agreement option.
This agreement basically means sharing an equal interest in the property.
And if one of the joint owners passes away,
the surviving owner then assumes a full interest in the property.
This essentially means that the property then would form
part of the surviving co-owners estate to distribute to their beneficiaries.
The most common application of joint tenancy
is when a married couple has a co-ownership agreement.
From an asset protection perspective,
joint property ownership offers limited asset protection, similar to individual ownership.
But, there are ways to structure your joint property agreement
in a manner that allows for more asset protection.
For example, under a tenancy in common agreement, you could put 1% of
the asset in your name and 99% of the asset in the name of your non-at-risk spouse.
But you’ll need to consult a legal expert on the best way
to navigate this agreement for asset protection.
And then, from a tax perspective, each tenant shares in the tax implications
and benefits from the tax deductions according to their ownership agreement.
For example, with Lisa and Bob agreement,
Lisa would declare 70% of the income expenses and claim 70% the tax deductions.
Bob will declare the remaining 30% and claim the remaining 30% in deductions.
Okay, next on the list of ownership structures is trust ownership.
Buying property through a trust has actually become a popular trend among Aussie investors
because of significant tax benefits and asset protection strategies.
The most common trust ownership structure is a family or discretionary trust.
Property investors use their family trust as an asset protection strategy
because it separates the owner and those who will benefit from the trust.
So, the beneficiaries have no right to any property within the trust because it’s held in
the trustee’s name. But they will still benefit from the income that that property generates.
And from a tax planning perspective, discretionary trusts allow the trustee
to divide the income between the beneficiaries in the most tax-effective way each financial year.
With a trust structure, the trust itself is not responsible for paying tax.
Rather, the beneficiaries pay tax on their share of the income.
So, the trustee can decide to distribute more income to the beneficiaries
who fall under a lower marginal rate to reduce the tax burden amongst beneficiaries.
But the catch here is that you can’t subtract negative gearing losses from your taxable income
as losses basically get stuck in the trust until it receives income to cover the loss.
Another thing to consider is that setting up and managing a family trust
can be a complex and costly exercise.
So, you’ll need to consider if the benefits exceed the costs of setting up and maintaining the trust.
The fourth ownership structure that might appeal to you would
be buying an investment property with a self-managed superannuation fund.
One of the most common reasons property investors choose to purchase property
within an SMSF is because there are several tax benefits available.
For example, an SMSF must pay 15% income tax on rental income.
So, if you personally fall into a higher marginal income tax bracket
that is more than 15%, then using an SMSF as a property ownership structure
could make sense from a long term tax perspective.
And once you retire or reach the pension stage and can access your retirement savings,
future income from the property investment will be tax-free.
Also, investment properties held in your superannuation fund for longer than 12 months
qualify for a capital gains tax discount on SMSF property sales,
and your capital gains tax liability will average down to about 10%
And from an asset protection perspective, generally,
the property is protected from creditors outside the fund.
There are also provisions in place if your SMSF loans money to make the purchase.
Because of an agreement called the Limited Recourse Borrowing Arrangement,
a lender can only access the property in question if the SMSF defaults on the loan repayments.
So the lender won’t have access to any other assets held by the SMSF.
But you must know that self-managed super funds are notorious for all their red tape. There are
strict superannuation rule guidelines which makes running one quite expensive and admin-intensive.
You can also only access the funds in the SMSF when you retire or meet the conditions
of release. So an investment using your super should generally be for retirement purposes.
The last structure I want to talk about is a company ownership structure.
This entails having your company own the investment property.
The biggest appealing factor of owning an investment property through your company
is that the income is taxed at the company marginal tax rate - which is a flat rate of 30%.
So if you’re an individual that falls in a high-income tax bracket,
a company ownership structure could be a great tax effective strategy.
The only downside of this is that you won’t have access to
the 50% capital gains tax discount if you eventually decide to sell the property.
Other than that, there is also a good degree of asset protection because the company is a
separate legal entity. So, the property will be protected from your personal liability.
But, you must know that it won’t necessarily be protected from the company’s liability.
And similar to managing an SMSF, there are quite a few legal considerations for setting up
and maintaining a company. It can also be quite costly to maintain.
So there you have it, guys.
Each ownership structure comes with its own advantages and disadvantages, so you’ll have
to weigh up the costs and complexity of each structure against what is most important in
terms of asset protection and tax implications before deciding which one best suits you.
Here at Duo Tax, we always advocate for building yourself an investment team of
mortgage brokers to help with the loan process, quantity surveyors to help with depreciation,
tax agents and accountants to help you maximise your tax incentives, and
property specialists to help you navigate all the other aspects of owning an investment property.
So make sure to get in touch with the relevant team to help you choose the right
ownership structure for your investment property.
That’s it from me.
I hope you found this video insightful. If you did,
make sure to like and subscribe to our channel for more property investment tips.
I’m Kim Quach from Duo Tax, see you next time!