Company or Trust for Investment Property

Yeah – this is a pretty common question.

Lets look at the options:

1. Buy in your personal name:

– if negatively geared then you will reduce you taxable income and save you 37 cents in the dollar (plus 1.5 cents medicare) for every dollar the property is costing you – this is good and could even make it cash flow positive once you take into account depreciation etc

– When you sell, if there is a capital gain then you will get smashed with capital gains tax because the net gain (after 50% general discount) simply gets dumped on top of your already high income and gets taxed at that rate – and based on your current income it wouldn't take too much to push you up into the 45% tax bracket ($180k plus) – this is bad

– if you have job where there is a possibility of someone trying to sue you, then having assets in your own name is not good as it puts them at risk

2. Buy in a companies name

– No CGT discount – this is very bad for a long term capital appreciating asset like property

– Doesn't help your personal tax situation

3. Buy in the name of a trust

– Great for positive or neutrally geared properties as you can distribute the surplus income to beneficiaries on a lower tax bracket (such as your wife or $3333/yr to your kid)

– CGT discount available (provided distributed to an individual)

– Not so good for negative gearing

Other options:

4. Hybrid trust / property trust

– If correctly structured with the right loan / lending set up you could get the best of both worlds – i.e. deductions on a loan in your personal name but ownership held in a legally separate (protected) entity with the ability to distribute future income and capital gains in a tax effective manner to lower taxed beneficiaries

– essential to be set up correctly

5. Self managed super fund

– best possible tax treatment (15% on income 10% on capital gains – or 0% for both if you are in retirement)

– negative gearing benefits available via salary sacrifice

– you likely already have amounts in super that can be used as a deposit

– flexibility to do a combination of bank finance (in SMSFs name) and member finance (you on lend to the SMSF also) which will enable you to re-coup some capital back into your own name via the SMSF repayment the member loan back to you

– excellent asset protection

– you can't re-borrow from any built up equity and use it for further property deposits – you need to sell and realise the gains/ profit to fund further investments to get the snowball effect happening

– higher initial upfront and ongoing costs

– ability to utilise other family members within the SMSF to gain access to profits before you retire* – so it is not locked away
*old person to be member of your SMSF sold separately

Summary

The above if a very basic overview based on the information you have provided.

You will need to seek paid professional advice to ensure you get the structure right – it will costs too much to change it down the track.

If you have any questions please throw them out for myself and other forum members to respond.

Evolve

It depends.

In your personal names, then there is no asset protection.

The greatest asset protection is with a discretionary trust. But the disadvantage with a trust is that losses are not able to be used to offset your personal income. However this may only be a short term problem as rents will hopefully grown. Once the property is making a profit then a DT will be the best for minimising tax payable as Evolve mentioned. This year it may be possible for an adult to earn up to $16,000 without paying tax – using low income tax rebates. So this will be a great savings.

In Australia different companies, trusts, smsf and individuals are generally separate entities for tax purposes and so the loss of one is generally not available to offset the income of another.

If a company has other income it could offset the loss of a negative geared property against this income, but this would be extremely risky from an asset protection point of view.

Hi there,

I am new to the site.  I was following this thread.  Great summary of the various options Evolve!  We are looking at buying our first IP.  Our FP has suggested MGS (Macquarie Group Services) Unit Trust products.  I am still reading through the docs and tyring to understand the ins and outs of a "NSW Land Tax Unit Trust (NSW)" and a "Standard Unit Trust".  Thoughts???

Thanks very much
S

I think l need to set up a trust? What do others think? How much and how difficult would it be to change our existing financial structure.

My husband and l own 3 properties together. We have an equal share in assets and the properties were purchased in our Individual names in our early twenties.  

Property 1 – Owners Home is owned outright
Property 2 – Investment is owned outright and rented
Property 3 – Investment Is mortgaged and rented. We owe $240k

My husband has just started working as a sole trader and we want to minimise our financial risk to our assets as a result of something going wrong in his business.

G,
Depending on your state you live in, you may be able to transfer the assets into your name. Whether that makes sense from a tax perspective needs to be answered for the IP's but you certainly could for the PPOR.

I agree with Terryw, if you are up for stamp duty and CGT, it may not be the wisest move. A company for a business is often a good vehicle and you could arrange ownership and directors according to your needs and that can include asset protection to an extent. If your husband is not a director, you obtain appropriate risk insurance you may be able to mitigate the risk.
Another option is to load up debt secured against the properties so that there is little benefit for great cost to take action against your husband personally. Obviously you use the equity released wisely.

There are options to consider.
Good luck
Greg

Thanks Greg and Terry for your advice.

Yes , we certainly want to avoid paying stamp duty and CGT.
 
l think l have ruled out a trust fund seems very expensive with little benefit.

Setting up a Company seems like a headache and costly too considering his business is predicted to make between 20- 30k as he is only working it partime.

Decisions, decisions…. more research required on my part thanks again
Gratitude

Evolve

I am not sure it would be possible to have person A claim the deductions and then person B get all the income or the CGs. There would be not commercially viable reason for A to borrow to buy the units if A wasn't guaranteed the income from the trust.

It could be set up with A claiming the interest on their purchase of the units and then later transferring those units back to the trust – it could revert to a discretionary, but then you would have CGT issues/

Hybrids have their drawbacks, but are still worth considering.

I think you will find it is way too complicated for a book to cover it all and be up to date. Things, especially in tax, change rapidly.

You will need a good law book to cover the legal aspects and a different one to cover the tax aspects.

A couple I have are:
-The Trust Structure Guide by Harwood Lawyers
-Drafting Trusts and Will Trusts in Australia by Kessler???
-Trust Law in Australia by Ong