Help in starting (more of an accounting question)

Hi there learningtoinvest,

The question you have asked opens many cans of worms and cannot be adequately answered in a forum such as this. You need to speek to an accountant/lawyer to get some advice as to how the different structures will affect your particular situation.

Having said that, I and the others on this forum can provide some general information which may be relevant or at least give you a starting point from which you base your enquiries.

Keep in mind that this is not intended as financial advice and please seek professional advice from a qualified and licensed tax/accounting advisor.

If you invest in your own name you will pay tax on any net income from your investments. You will also pay capital gains tax when you sell, although you get 50% CGT discount if you hold for more than a year. If you make a net loss each year, you get to claim a tax deduction for it. If you default on the loan and it gets repo’d and sold off by the bank, and you owe more than the selling price, the bank (or their mortgage insurer) will sue you to recover the balance. This may put your other personal assets at risk. But you can get mortgage repayment insurance to mitigate this. Also, you are exposed legally if anyone wants to sue you in relation to the property (eg. the house is structurally deficient and a tenant falls through the floor and injures themselves). Again, you can insure against this risk.

A sole trader is basically you personally operating a business. It is not a separate legal entity to yourself. It is just a term meaning you, carrying on a business. The legal liabilities would therefore be the same. The tax liabilities would mostly be the same, although there might be more deductions available if they were business expenses. It also depends if your are carrying on a business doing something else, and also investing in property, or if you are carrying on a business of property trading or property management. If you are carrying on a business of property trading, all your profits on selling would be taxed as business profits, not capital gains, therefore you would not get 50% CGT concession. As a sole proprietor if your turnover (gross revenues) is >$50K you will need to register for GST and lodge BAS’s etc.

The difference with operating ta company is that a company is a separate legal entity to its owners (ie. you) and therefore if it owns the property, it will be legally liable. People would sue the company, not you, for any legal claims. Also, the revenues (rent) and expenses (interest, rates, management fees, maintenance) etc would be earned and incurred by the company. The company tax rate is 30%, which may be higher or lower than YOUR marginal rate. Also, no 50% CGT concession on selling the property. If you wanted to pull money out of the company, it would usually be treated as a dividend (therefore assessed to your PERSONAL taxable income) or a salary (again personally taxable to you). It takes about $1000 to set up a company, and you need to lodge a separate tax return and ASIC return each year. The you also have to consider GST and lodging a BAS (business activity statement) every quarter.

Another structure to consider is a trust. A trust will provide legal protection as well as potential tax considerations. That is another story altogether and a little complicated for me to explain in a few lines.

I have talked over a trust with my accountant. It’s not cheap as you need to involve accountants and lawyers, and at the end of the day what really is the risk of everything going pear shaped and you getting the pants sued off you? If you have the correct insurances in place, he suggested you should be OK to invest as an individual.

Hope this helps. Any other forumites wish to add to this, or correct me if I have said something incorrect?

Regards,

eeshole