In our November 2021 article regarding property ownership and investment, we flagged a list of issues that all property owners and investors may need to consider. As promised, we are going to dive deeper into these areas over the coming months, and what better place to start with than considering the options in relation to who or which entity should own your property.

The correct ownership structure for your investment property is extremely important, as once you sign and exchange the contract, the stamp duty costs of changing this usually prevent you from making any changes. You normally only have one chance to get this right, so you have to get this correct from the outset.

There are two main needs that usually rank above all others for property investors and developers – how do I protect my property from the risks associated with my business and personal activities, and how do I minimise the tax payable in relation to my property?

There is no one size fits all approach, and no particular entity that ranks above others when trying to meet these needs. Every property investor or developer has their own unique circumstances, and their own plans and intentions for their property. This is where the real skill and value from seeking the guidance of a business advisor comes in to play, sitting down and discussing your plans and intentions for the property, and then working through the pros and cons of the various structure options available, to arrive at the structure that best suits your particular circumstances.

Here are the ownership options you have available, and some of the circumstances and considerations relevant to each structure.

Individual / Spouse

• Capital Gains Tax (CGT) main residence exemption for the family home
• A simple asset protection strategy – own one or more properties in the name of the spouse who is not a director of your trading company
• Offset negative gearing losses against your other income – minimising annual tax liabilities
• Eligible for the 50% CGT discount for properties held for longer than 12 months
• Eligible for land tax free thresholds – reducing your annual land tax liability.

Discretionary (Family) Trust

• Asset protection – can protect your property from the risks of your personal and business activities
• Asset protection – undertaking a property development within the trust can separate the risks of these activities from your personal assets
• Discretionary distributions of annual rental profits, large one-off development profits, and capital gains on the sale of your property – minimising your tax liabilities
• Eligible for the 50% CGT discount for properties held for longer than 12 months.

Unit Trust

• A common structure for two or more associated investors – allowing you to invest with your business partners, family or friends
• Asset protection – can protect your property from the risks of your personal and business activities
• Asset protection – undertaking a property development within the trust can separate the risks of these activities from your personal assets
• Eligible for the 50% CGT discount for properties held for longer than 12 months.

Company

• Asset protection – can protect your property from the risks of your personal and business activities
• Asset protection – undertaking a property development within the company can separate the risks of these activities from your personal assets
• Access to the lower company tax rates of 25% (property development) or 30% (rental property) – minimising your tax liabilities
• Eligible for land tax free thresholds – reducing your annual land tax liability
• Discretionary distributions of annual dividends through a discretionary trust shareholder – minimising your tax liabilities.

Self-Managed Superannuation Fund (SMSF)

• A common structure for the purchase and ongoing rental of your business premises – an alternative to paying rent to a landlord
• Asset protection – can protect your property from the risks of your personal and business activities
• Annual rental profits are taxed at 15%, and capital gains at 10% (when properties are held for longer than 12 months) – minimising your tax liabilities
• Once the SMSF enters pension phase, potential for rental profits and capital gains to be tax-free
• Eligible for land tax free thresholds – reducing your annual land tax liability.

The above lists some of the considerations where a particular structure may be an option in your circumstances, but there are also a number of downsides to each of these structures as well. It’s important therefore to weigh up the pros and cons of each of the above structures and to apply these to your specific circumstances, and your plans and intentions for the property, so as to arrive at what is the best option to structure the purchase of your property.

An average property investment in the current market is heading closer and closer to a million dollars, with many investors moving well beyond this level again. Seeking the advice of a business advisor who is experienced in property matters is a small price to pay in relation to such a large investment.

If you are looking for some personal guidance in relation to your property activities, reach out to Lambourne Partners below or call (02) 4969 6600 and we can help you structure the purchase of your next property in a manner that best suits your personal needs and circumstances.