When it comes to investing in property, there is a lot of information readily available around what kind of property will give you the best return and how to choose the right loan. However, there’s very little information or discussion around ownership or loan structure even though it’s fundamental for property investors to consider these structures carefully. Remember, your decisions will not only impact you now but into the future.
What should I consider when it comes to ownership structure?
An important consideration when determining ownership structure is asset protection. If you have an owner-occupied property and an investment property in your personal name, there are serious risks in the instance of bad debt or other dealings. For example, if you own a business and something goes wrong or you get sued, having property in your name means you can easily have it taken off you. If, however, things go south and your property is secured in a company, it is at arm’s length and makes it harder to be seized because the property isn’t in your name. Creditors may be able to use your residential property to make good on their losses meaning you could lose your home. When it comes to asset protection, Jason Robinson, Director of Future Advisory, says “not cross securing property” is one way to protect your investments.
“Banks generally cross secure which is a stronger position for them,” he says. Not cross securing vs cross securing is important to understand as this can have future implications.
Having a structure where your investments are not connected to your other liabilities is an important step to risk reduction.
There are tax implications and potential discounts that vary from one kind of ownership structure to another. For example, as detailed below, holding a property through a self-managed super fund can lead to a tax reduction. If you’re setting up a company, the Australian Government has a guide on tax obligations you need to meet based on what loan structure you opt for, with ‘individual’ being the lowest in terms of obligations and ‘trust’ being the highest.
When it comes to which ownership structure is right for you, it is important to ensure the tax structure you’ve chosen aligns with your long-term strategy. Ask yourself questions like:
- why are you buying the property?
- what timeline do you have?
- around how long you plan to hold on to the property?
Please note this advice is general only, so it is important to consult a financial professional before making any decisions.
Unnecessarily complex structures can be expensive to maintain. While there is a range of different structures available, sometimes the simplest option is the best. For example, if you have 10 investment properties and you set up 10 different companies for the sake of having one company per property, you’re probably overcomplicating things. You’ll need to service each of these companies – that’s 10 different sets of company and accounting fees. Avoid overcomplicating your structures and ensure you seek regular financial advice as things change. Remember, everyone’s financial situation is different, so it’s important to reach out to a finance professional before making any big decisions.
Let’s talk ownership structures
Choosing the right ownership structure for you will vary considerably depending on several factors, including whether you are self-employed. Taking time to consider and research ownership structures will hopefully mean you choose a structure that enables you to maximise your returns, save on tax and protect your assets.
We look at the varying ownership structures below.
The most straightforward ownership of a property is holding a property in your name. If you have purchased an owner-occupied home, you will also benefit from capital gains tax exemptions.
In this instance, you are solely liable to pay all the associated costs and expenses. You also don’t have any asset protection if you find yourself in a situation where you’re personally sued.
In Australia, a company can be set up for either trading purposes or to hold assets. Each business or company is governed by a set of tax rules and legislation, based on what structure you choose. Setting up a company to hold an investment property means the property and mortgage are in the company name providing you with greater asset protection. The Australian Property Investor says this is because ‘a company is a separate legal entity that is controlled or run by the directors but owned by the shareholders, and thus can create separation of ownership and control.’ However, there are additional tax implications. For example, you don’t benefit from the capital gains tax discount. Determining whether this is the best option may depend on how long you plan to hold the property. If you’re unsure, it’s always best to check with your accountant.
Another popular option with investors is for a property to be held by a trust. There is a range of trust setups like a family trust or unit trust. Many trusts are purposefully designed to minimise tax. A family trust provides greater flexibility, as well as asset protection, as there are no defined unitholders.
A unit structure on the other hand can be useful for non-related parties. Within this structure, you have a defined interest so your profit from the property is the same as your interest within the trust.
There can be a range of complexities associated with lending when you are borrowing through a trust so it’s worth discussing this with your accountant and financial planner before applying for finance.
Self-Managed Super Fund (SMSF)
An SMSF can be a tax-effective vehicle within which to hold property. This is because the government wants to encourage people to invest and create wealth to allow them to retire comfortably (and not rely so heavily on a government pension). An SMSF is taxed at a reduced rate which is beneficial if you use it to purchase an investment property. There is also no tax payable on rental income or capital gains on your SMSF property after retirement so it might be a good option to boost your retirement fund.
When it comes down to it, there is no one-size-fits-all when it comes to an ownership structure. The range of considerations and complexities will differ from one person to the next, so it’s paramount that you seek financial advice about which structures and options work best for your circumstances. A well-thought-out property strategy combined with the right ownership structure should ultimately help you reduce your tax liability while also helping you build wealth. If you’re considering investing in property for the first time, or adding another property to a budding portfolio, get in touch for a no-obligation, free meeting.