If you’re a property investor, then you’re probably on the hunt for the next property to add to your portfolio. However, it’s crucial to select the proper investment structure to protect your investments and help you save taxes. You’ll also have to consider some issues, such as taxation, costs and complexity, and asset protection.
It also helps to know the most common investment structures in Australia. These include individual, company, and trust. Here’s what you need to know about them:
Under the law, an individual is recognised as a separate legal entity. That means owning an investment property under an individual’s name is the most affordable and straightforward option in the country. However, it’s crucial to note that this structure does not provide any asset protection to the property investor.
Luckily, you can use any negative losses generated from the investment to offset your personal income, making it a great choice. If you sell the property and make capital gains, you can take advantage of the 50 per cent CGT discount if you owned the property for at least 12 months before selling it.
Like the individual structure, a company is also recognised separately under law. If you, an individual, get sued, your property won’t be at risk since the company legally owns it, not you. However, if you own all the shares of the company that owns the property, these shares would also be in jeopardy if you get sued.
The rental income earned by the company from the property will get taxed at the corporate tax rate, which is much lower than the individual tax rate. Still, any negative loss experienced by the company will be stuck inside it, which it will need to carry forward to offset the loss against its future income. If it sells the property and makes a capital gain, then it cannot claim the 50 per cent CGT discount, unlike under the individual structure. Ultimately, this can make a significant dent in your return on investment if you go down this route.
Unlike the previous two structures, a trust is not recognised as a separate legal entity. In this structure, a trust consists of a relationship where a person, the trustee, is obliged to hold a property for the benefit of other people or the beneficiaries. The trust deed outlines the relationship between the two entities. A discretionary trust, known as a family trust, can offer sufficient asset protection since the trust’s beneficiaries generally cannot access the income or capital of the trust until the trustee creates a resolution to distribute the assets to them.
A discretionary trust offers maximum flexibility when handling the net rental income of the trust for tax purposes since the trustee can distribute various amounts of payment to the different beneficiaries. The same flexibility may apply to the distribution of the capital gains to the beneficiaries, although this is highly dependent on the trust deed.
A trust deed can qualify for the 50 per cent CGT discount. That means that if the trust made a capital gain, held the property for at least 12 months before selling it, and distributed the capital gain to an individual or another trust, they can claim on the discount. However, similar to the company structure, any negative gearing loss produced from a trust-owned property is retained in the trust unless it has other income to compensate for the loss.
If you’re hoping to add more investments to your portfolio, then our guide to Australia’s ownership and investment structures will help you narrow your choices and choose an investment that works best for your needs. You can also seek the advice of a Caloundra estate accountant for more guidance into the structure that suits your preferences and goals.
Wardle Partners Accountants & Advisors is a team of Sunshine Coast accountants that can make all business accounting, tax, self-managed superannuation fund and bookkeeping matters simple for you. We also provide guidance on ownership structure, property development, and more. Contact us today to learn more about what we can do for you!