The question of whether to buy your property or purchase a property in your name, your company name, or a trust is a common one, especially in the property market of Australia.
You might think you generally buy your own home in your own name. So, when you decide to invest in property, it makes sense to buy it in your own name as well – right?
Not always. When it comes to buying property, getting the ownership structure wrong is one of the most costly mistakes an investor can make. The ownership structure, whether a person or company owns the property, can have significant legal and financial implications.
What can makes matters worse is the fact that there is no ‘one size fits all answer’ regarding which structure you should use. Whether a trust or company structure is more suitable often depends on individual financial goals and circumstances.
“There are benefits and drawbacks to each ownership structure,” explains WSC Group CEO, David Shaw. “You should always seek professional advice before you purchase a property.”
To help get you thinking about the potential options available, Shaw has outlined the pros and cons of various buying structures:
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Buying in your own individual name/s
One of the most common ownership structures is simply to buy a property in your own name or jointly with others. This direct ownership structure where the legal owner is the individual can offer straightforward benefits.
“The benefits of owning your property in your own name include full access to negative gearing benefits, eligibility for a full CGT discount if the individual is an Australian resident for the whole ownership period, and possible land tax savings as compared with other structures”David Shaw
“Plus, it can be more cost effective to set up and maintain.”
However, owning property in your name can limit your asset protection capabilities, particularly if you are in business for yourself. This structure does provide direct control, but it’s worth noting that many property investors often overlook potential risks.
If your property is positively geared, be mindful too that all of the income has to be declared in the name of the individual/s who own the property. This could mean almost half of your property profits could be absorbed by the tax man.
Buying in a company name
Investing in property through a company structure has seen fluctuations in popularity. Buying investment properties within companies has become less common over the years, largely because companies are not eligible for the 50% CGT discount that individuals receive if they hold a property more than 12 months.
That said, Shaw says there are some benefits to owning properties within a company structure, including increased asset protection. Such a structure allows the property to belong to the company, and not to any one individual.
“In some states, a company is eligible for its own land tax threshold – but watch out for grouping provisions. Also, if the property is positively geared, the income tax payable within the company is capped at 30%, which is much lower than the effective 49% individual top marginal rate.”
It’s essential for prospective property buyers to understand the disadvantages of buying property in a company name. Without the potential for a CGT discount, the company may end up paying more over time, especially if the property appreciates significantly in value.
Always review the pros and cons when considering a company structure for property investment.
Buying in a trust
Property investment within a trust structure is an avenue many Australians are curious about. There are two main types of trusts you can purchase property within; unit trusts (sometimes referred to as fixed trusts) and discretionary trusts (sometimes referred to as family trusts).
“The benefits of trusts include increased asset protection, particularly when using a corporate trustee, and you can access negative gearing benefits for unit trusts if your loans are structured correctly”David Shaw
Furthermore, trusts are generally entitled to the 50% CGT general discount. Better still, if you’re using a discretionary trust, you have discretion as to who receives the income of the trust each year. This can be an advantage when trying to distribute income in the most tax-efficient way.
“The drawbacks can include the costs to set up a trust, as well as increased ongoing costs, differing land tax rules depending on the state, and negative gearing benefits can be hard to access, particularly using a discretionary trust,” Shaw adds.
As one can see, there are many benefits and drawbacks of owning property through a trust. The decision to purchase property within a trust structure should not be taken lightly, and always remember to seek professional advice before finalizing any property deals.
Why trusts are gaining popularity among Australian property investors
The Australian property market has always been a dynamic landscape. Many property investors are now leaning towards the use of trust structures when it comes to buying properties. But why is this becoming a favoured choice?
A trust is a legal arrangement where a person or company owns assets for the benefit of others, commonly referred to as beneficiaries. The trust provides an avenue to ensure that assets are managed and distributed according to the trust’s terms and objectives. The trust deed outlines the specific terms under which the trust operates, and it’s imperative to review the trust deed comprehensively before moving forward.
The trust and the property market
While the benefits of buying property in a trust are many, it’s the tax benefits and asset protection that stand out the most. When property is negatively geared, the potential tax benefits can be significant. The trust structure increases the chances of benefiting from these deductions.
Moreover, with the unpredictable nature of the property market, having your investment properties shielded within a trust can provide that extra layer of protection against creditors.
Understanding the trust tax returns and implications
It’s worth noting that trusts are subject to their own tax return requirements. Trust tax returns can be complex, particularly when it comes to distributing the income. The discretion of the trustee plays a pivotal role in deciding how the income from an investment property within the trust is allocated among the beneficiaries. This can impact the overall tax rate applied to the income.
Seeking professional advice: The key to making informed decisions
As highlighted earlier, whether a trust or company or buying property in your name is the best route, it is a decision that hinges on multiple factors. Always ensure that you’re not just chasing tax benefits. Whether to buy should be determined by your long-term financial goals, risk appetite, and the potential growth of the property in question.
While trusts offer a myriad of advantages, they also come with their unique set of challenges. Costs, the potential for the income to be trapped inside the trust, and the lack of flexibility in some instances can be drawbacks.
Given the complexities, many property investors find it invaluable to seek professional advice. Engaging with professionals ensures that you’re not only aware of the benefits but also the potential pitfalls.
Advantages of owning property through different structures
It’s essential to weigh the advantages of owning property in various structures. Whether it’s through individual names, company structures, or trusts, each comes with its unique benefits.
Types of trusts and their role in property investment
Types of trusts are not universally the same, and understanding each is vital. From discretionary trusts often termed family trusts to unit trusts and hybrid trusts, the choice can affect the control and distribution of income from properties.
For instance, discretionary trusts give the trustee the discretion to distribute trust income among beneficiaries. On the other hand, in a unit trust, the distribution is fixed based on the number of units each beneficiary holds.
Hybrid trusts combine elements of both discretionary and unit trusts. It offers flexibility in distributing income and capital gains, which can be a distinct advantage in property investment.
Trust as an ownership structure
When you hear trust structure is an ownership structure, it means the legal entity holding the property isn’t an individual but a trust. This ownership structure where the legal owner is a trust comes with distinct tax implications, potential benefits in asset protection, and flexibility in distribution.
Setting up a trust for property investment
If you’re convinced about using a trust structure for property investment, the next step is to set up the trust. While it might seem daunting, with the right guidance, it becomes manageable.
Remember, the terms of the trust deed determine how the trust operates. So, it’s pivotal to have a clear trust deed, which can be crafted with the help of professionals. From specifying the trust beneficiaries to detailing how properties would be managed, it’s all there in the deed.
Also, consider the cost implications. While there’s a cost to set up the trust, there might be ongoing expenses like accounting fees for trust tax returns and potential stamp duties.
Property purchase considerations
Lastly, before you purchase the property, always evaluate your reasons and the potential returns on investment. When it comes to buying property, whether in a company or trust, being well-informed and having clarity on your goals is paramount.
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