Property tax tips: choosing the right investment structure
It’s one of the most important decisions when buying an investment property. What structure should you use to hold the investment? Given that the there are numerous investment structures available including Individuals or Jointly, Partnerships, Companies, Fixed or Unit Trusts, Discretionary (Family) Trusts, Hybrid Trusts, and Superannuation Funds, how do you decide? Here are some important considerations:
Accessing negative gearing benefits
If you purchase property in a trust or company and the property is negatively geared, the losses will be trapped at the trust or company level (unless you have other income, such as business income you can “inject”) and cannot be offset against income derived by a beneficiary or shareholder. However, an individual (including a partner) can offset negative gearing losses against other income.
Whether the 50% CGT discount can be accessed
Companies are unable to access the 50% Capital Gains Tax (CGT) discount and superannuation funds are only eligible for a 1/3 discount. Individuals receive the full 50% discount and trusts can pass out the CGT discount to individuals.
Ease of accessing equity
As property prices rise, you may seek to draw down on the capital (by refinancing, for example) to use for other purposes. However, capital can generally only be accessed tax-free from discretionary trusts and by individuals (including in partnership). Capital cannot generally be accessed tax-free from a company, as any payment is generally treated as a dividend. In relation to unit trusts, any drawings by the beneficiary will reduce the cost base of the units, potentially triggering a CGT event.
In an increasingly litigious society, protection of assets from lawsuits and creditors is an increasingly important consideration for people who may be at risk. Professionals, such as doctors or dentists, due to their exposure to professional negligence, may have asset protection as their main aim. Different structures offer different degrees of asset protection.
Ultimately the decision will be between you and your Accountant as to which structure is most suitable for you. However it’s important that you choose professionals such as finance brokers who understand the different structures so they can work with you to ensure you are structuring your loans in the most appropriate manner for you.