Choosing the right ownership structure for an investment property sets the groundwork for everything else, from taxes to long-term financial flexibility. This is why you must choose the right one from the get-go. The good news is, you don’t have to figure it out alone. A lawyer for property, for example, can help you navigate the pros and cons to identify the structure that works best for your goals. With the many ownership structures available in Australia, you’ll need all the help you can get to make the right decision.
What to consider when choosing property ownership?
Given the implications if you choose wrong, it’s important to take a step back and look at what really matters. The structure you choose must offer protection and efficiency without the high cost.
1. Asset Protection
Keep your personal wealth separate from investments to shield both from any eventuality. You don’t want your own funds to be dragged down if something goes wrong with your investment, and vice versa.
- Look for structures that better protect your personal assets than others.
- Owning property as an individual offers weaker protection than trusts and company structures.
- Asset protection is non-negotiable for people in high-risk professions or with significant personal wealth.
2. Tax Implications
How you own a property can have a big impact on your tax bill, both now and in the future.
- Individual ownership gives you access to the Capital Gains Tax (CGT) discount when the right conditions are met.
- Trusts can distribute income flexibly, helping reduce tax depending on the tax brackets of your beneficiaries.
- Companies don’t get the CGT discount, but they have the option to reinvest profits at the company tax rate.
- Super funds (SMSFs) have lower tax rates but require strict compliance with rules and limits.
3. Cost and Complexity
Every ownership structure costs money, but the more complex types are more expensive to set up and maintain.
- When you want the most straightforward and cost-effective option, choose between individual and joint ownership.
- Trusts, companies, and SMSFs will cost you higher setup costs and ongoing compliance requirements.
- More complex structures require ongoing accounting, legal, and administrative support.
Available Investment Property Ownership Structures
Here’s a breakdown of the primary ownership options that Australian investors can explore, including what each one offers and lacks.
Individual Ownership
- Setup is easy and inexpensive.
- All deductions can be claimed directly on your personal tax return.
- It may be eligible for the CGT discount after twelve months.
Trust
A trust is a great option for better tax planning and asset protection, but it’s also more complex. Trusts can be discretionary or family trusts, or unit trusts.
- Flexible distribution of Income and capital gains to beneficiaries
- Tax comes from the hands of beneficiaries and not the property itself
- Requires a trustee and annual compliance
Joint Property (Co-Ownership)
- You can share property ownership with someone else as joint tenants or tenants in common.
- Costs and responsibilities are shared between co-owners.
- It may create complications if owners don’t share investment goals or are in the same financial situation.
In choosing an ownership structure for an investment property, always consider your financial goals, risk tolerance, and long-term plans. Getting it right from the start will prevent huge problems in the future. If you need expert advice on commercial and investment properties, speak to a lawyer from Coleman Greig Lawyers.