Best ownership and investment structure for property investors in Australia
If you are looking at buying property in Australia, choosing the right investment structure is very important. It will ensure that you protect your investments and save tax at the same time.
Key issues to consider
In selecting the right investment structure, the key issues to consider are:
- Asset protection
- Taxation issues
- Costs and complexity
Most common investment structures in Australia
In Australia, the most common investment structures are the following:
- Self-managed superannuation fund (SMSF)
Individual structure for property investment in Australia
An individual is a separate legal entity at law. Owning an investment property under an individual’s own name is the simplest and cheapest option available in Australia. This structure does not offer any asset protection to the property investor. However, any negative gearing losses generated from the property investment may be used to offset the personal income of the property investor. If the property is sold and a capital gain is made, the property investor can take advantage of the 50% CGT discount if the property has been held by the individual for at least 12 months before it is sold.
Company structure for property investment in Australia
A company is a separate legal entity at law. Generally speaking, this means that, if the individual gets sued, the property will not be at risk because it is legally owned by the company, not the individual. However, if an individual owns all the shares of a company that owns the investment property, the company shares would be at risk if the individual gets sued.
The rental income derived by the company will be taxed at the corporate tax rate, which is substantially lower than the individual tax rate. However, any negative gearing loss incurred by the company will be trapped inside the company and will need to be carried forward to offset against the company’s future income. If the property is sold and a capital gain is made, a company cannot claim the 50% CGT discount on any capital gain derived. This can make a big difference to the return on your investment.
Trust structure for property investment in Australia
A trust is a not separate legal entity at law. A trust is a relationship where a person (the trustee) is under an obligation to hold property for the benefit of other persons (the beneficiaries). The trust deed defines the relationship between the trustee and the beneficiaries.
A discretionary trust (also known as a family trust) may provide reasonably effective asset protection as the beneficiaries of the trust are generally not presently entitled to the income or capital of the trust until the trustee makes a resolution to distribute the income or capital to them.
For tax purposes, a discretionary trust generally provides maximum flexibility in dealing with the net rental income of the trust as the trustee of the trust has the discretion to distribute different amounts of income to different beneficiaries. Depending on the trust deed, a similar flexibility may also apply to the distribution of any capital gain to the beneficiaries.
A trust can take advantage of the 50% CGT discount. This means that if the trust makes a capital gain and has held the property for at least 12 months before it is sold, the trust can claim the 50% CGT discount if the capital gain is distributed to an individual or another trust.
However, as with a company, any negative gearing loss generated from a property owned by a trust is stuck in the trust, unless the trust has other income to offset the loss.
Legal advice from Australian tax lawyers
This article is offered as general information only and should not be relied on as specific legal advice for investment structures in Australia. This article does not cover all the federal and state taxes that may apply to property investments in Australia. For instance, it does not deal with stamp duty and land tax issues that are complex and need to be carefully considered before making any property investment in Australia.
To get legal advice from King Lawyers on your specific circumstances, please contact us to arrange an initial consultation.