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Howdy all, another Youtube video for you guys.
So, if you have ever wondered what is the best structure to purchase property in, then please have a watch below!
Buying property has both legal and tax considerations so we must get it right first time, as it will be costly and difficult if we need to change later on.
Today’s video goes through the 3 common structures of an individual, a company and trust as well as the pros and cons of each.
It’s important to consider your ownership structure because it may have tax as well as legal consequences depending on which structure you buy in.
It’s important to note that this is general advice only and so make sure you obtain professional advice such as from an accountant or your lawyer to decide which structure is best suited for you
Structure 1 – Individual
Buying under individual names is the simplest and cheapest option, e.g. TFS buys XYZ.
It is also the most straightforward when applying for a loan.
If you are buying the family home, there is no capital gains tax incurred if you sell down the track. If you are buying for investment, you are able to claim negative gearing (tax deduction allowed for income producing assets).
There is also a 50% capital gains tax discount if the property was held for at least 12 months before it is sold.
However, when purchasing as an individual your financial and legal responsibilities are not limited or protected. This means that you are legally liable for the property.
So if you were to be sued, you would be liable for the outcome.
If you are in a particular litigious industry such as medicine be careful of this.
Structure 2 – Company
A company structure is a separate legal entity to individuals and hence has increased asset protection as the asset is held by the company not the individual.
Therefore you will see a lot of more sophisticated property investors or developers buying in this structure.
Most companies with income under $25m has a flat 27.5% tax rate for any income produced. This can be beneficial if you are high income earner where you may be paying a 47% tax rate.
However, unlike buying in individual names – there is no access to any CGT discount if the property is sold.
Also, if there is any negative gearing incurred by the company, these are carried forward each year to offset any future income.
And finally, it is costlier and more expensive to set up and maintain.
Structure 3 – Trusts
Finally, the other most common ownership structure is a trust.
There are two types, unit trust and family trust. The family trust structure is what most people take up.
This is because it offers tax benefits, provides asset protection and can also be a smarter way for estate planning.
If you’re unfamiliar with trusts, here is a simple explanation:
- Imagine a car with two adults in the front seats, and two children in the back seats. The car itself, is the trust, it is just a vehicle. The driver, is what’s known as a trustee – he or she drives the direction of the vehicle. The other passengers are termed beneficiaries, they derive benefit from the trust, under guidance from the trustee.
A benefit of a trust is that the distribution of profits can flow to those individuals on lower tax brackets. The same can apply to distribution of any capital gains.
There is also the 50% CGT discount in play but there is no negative gearing allowed. Any loss generated is stuck in the trust to offset against any future income.
Trusts can also provide increased asset protection, as the beneficiaries are not entitled to any income or capital, until the trustee makes a resolution to distribute income or capital to them. Also, if any beneficiary becomes bankrupt, any assets owned by the trust is insulated from potential creditors.
There are plenty of other ownership structures, such as:
- Joint Ventures – mainly for development between two unrelated parties
- Syndication or Pool funds – as the name suggests, for pooling money together to acquire bigger assets
- Self-Managed-Super Funds – this is where you create your own super-fund for investing.
But whichever way you go, make sure you obtain professional advice from your lawyer or accountant before proceeding.
Everyone’s circumstances change in the future so it is essential you get the structure right as it may cost you thousands or tens of thousands later on down the track if you wanted to change structures.
Hope you guys liked the video!
Let me know in the comments below what you thought please!
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