There are four broad types of ownership to consider when purchasing a property:
personal name;
company;
trust; and
self-managed super fund (SMSF).
Each different form of ownership has vastly differing implications in terms of asset protection and tax effectiveness.
It is vitally important to consider which type of ownership you will adopt before you buy. Wherever you are unsure, talk to your accountant or tax advisor before committing to purchase the property. Changing entities after you enter into a Contract to purchase may cost you plenty in terms of additional stamp duty or a greater capital gains tax (CGT) liability.
Each form of ownership suits different people, and has a range of benefits or disadvantages depending on your circumstances.
PERSONAL NAME
With this form of ownership, you as an individual, or with other individuals, appear on the title to the property.
Generally speaking, personal name ownership is suitable for the vast majority of residential property owners. This includes people who are buying a home to live in, primarily because personal name ownership, in most instances, enables the owner to claim a full exemption from CGT.
Personal name ownership is also suitable for those on high incomes buying an investment property. This is due to the benefits associated with negative gearing, which can significantly reduce liability at tax time. It should be noted however that negative gearing has received plenty of bad press in recent years and will certainly come under review in the future.
Conversely, owning a residential investment property in your personal name means triggers a Capital Gains Tax liability when the property is sold. If the property is held however for over 12 months, the taxpayer will generally be eligible for a 50% discount on their CGT liability.
There are also tax implications if the property is positively geared.
COMPANY OWNERSHIP
A company is in itself, a separate legal entity which can both acquire and dispose of assets, lodge tax returns, pay tax, can sue and also be sued.
Company ownership is generally inappropriate for owner occupiers. This is due to the fact that companies aren’t eligible for an exemption on CGT.
Company ownership is also unsuitable for residential property investors, because companies can’t get the 50% CGT discount applicable to property held for more than 12 months.
In some cases, company ownership may be suitable for commercial properties. This could include businesses who wish to acquire their own premises. Such an ownership structure would generally be at the suggestion of your accountant of financial advisor. It is vitally important that you consult your advisor if you are considering purchasing a property in the name of your company.
TRUST
Unlike an individual or company, a trust is not a separate legal entity.
A Trust is a vehicle to hold assets on behalf of nominated beneficiaries (that is, the individuals or companies whom you wish to receive income or capital gains from the trust’s assets).
It’s difficult for creditors to get hold of assets in a trust because they are not owned by the beneficiaries. Trusts also enable you to minimise the tax liability from rental income and capital gains by distributing them amongst a multiple beneficiaries with the lowest marginal tax rate.
Conversely, trusts can only distribute profits, not losses. This makes them unsuitable for most residential property investors, who rely on negative gearing benefits to hold their assets.
SELF MANAGED SUPERANNUATION FUND (SMSF)
Superannuation is basically saving money now for when you retire. The savings are paid into your super fund by your employer. The majority of people have their super in a fund managed by a third party.
The government also encourages individuals to make voluntary contributions from your pay or savings to increase your super with generous concessions.
However, a growing number are running their own funds. The main reason to buy residential property in an SMSF is because of the concessional tax rate: 15% on monies held in the fund and zero when they are withdrawn upon retirement.
SMSFs aren’t appropriate for owner occupied property or holiday homes. This is due to the fact that assets in the fund cannot be used for personal use, even if it’s only for a week or two each year.
Typically, this method of ownership is most useful for those with an appropriate amount of amount of money held in their existing superannuation or in their SMSF. This us mainly due to the fact that:-
* lenders require a higher percentage deposit from the SMSF. You can typically borrow up to 80% for residential property if your fund has a corporate trustee, and 72% if your fund has individuals as trustees.
* there may be higher loan setup costs and higher interest rates; and
* SMSF regulations can be complex and costly, with annual administration and compliance costs averaging $2,000.00.
Owning a property in a SMSF can have a significant impact on the security and tax effectiveness of your residential property portfolio. These impacts can also vary when your circumstances change. Accordingly, it is vital that you obtain detailed advice from your tax advisor.
First State Conveyancing has considerable experience acting for individuals, companies, trusts and SMSF’s alike. For any property related queries, contact First State Conveyancing TODAY!
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