Many Australians invest in property as it can be a great way of building wealth. But when it comes to the name on the title deed, some investors miss a trick by buying it in their own name. This means they could miss out on a range of legal protections and tax benefits that alternative options may bring to the table.
So, what are the different ownership structures you can use when buying off-the-plan property?
Here are the most common five:
Purchasing off-the-plan property as an individual or with a partner or spouse needs little introduction, as it’s a common way of owning property. Putting your name on the deed comes with definite pros, including:
- Less expensive to set up and run
- Less paperwork than other structures
- Can be more tax-effective (if it’s a negatively geared investment property)
- Capital gains tax exemption (if the property is the family home)
However, the biggest downside is little to no asset protection from your creditors should you get sued.
A partnership is another relatively simple ownership structure to set up. In this case, a legal entity is created with its own tax number and tax return. However, the entity does not pay tax. Rather, it distributes income to the co-owners according to the partnership agreement.
The benefits of partnership structures include:
- Can make buying property more affordable as deposits are shared and borrowing power potentially multiplied
- Can make owning property more affordable as expenses are typically split between co-owners (depending on the partnership agreement)
However, partnership ownership structures can be risky – especially if there isn’t an airtight partnership agreement in place before you start. For example, if one member falls behind on their mortgage repayments, the other party is personally liable for the debt.
Partnerships also offer limited risk protection, as your assets could be subject to a claim from your partner’s creditors.
You can buy off-the-plan property through a company. Under this structure, a legal entity is created which is run by appointed directors and owned by shareholders.
As the property and mortgage are held by the company, you get increased asset protection from possible litigants. The other big advantage is the 25% corporate tax rate on profits.
However, downsides include:
- Losses can only be offset against future income
- No capital gains discount on the sale of investments
- Can be expensive to set up and maintain
Setting up a trust is another option you have when buying off-the-plan property. There are three main types of trusts (excluding self-managed super funds):
- Unit trusts
- Family discretionary trusts
- Hybrid trusts
Units trusts are similar to company structures and are often used when unrelated parties run a business together. All parties have a fixed defined unit interest in the trust, with any profits distributed following this ratio. As the property is bought and held by the trust, this structure offers a good level of asset protection.
Family discretionary trusts don’t have defined unitholders. As such, they come with greater asset protection and have more flexibility when it comes to profit distribution.
Hybrid trusts add an additional layer of protection. However many lenders are wary of them, so it can be difficult to obtain financing.
Trusts are generally more affordable to set up and maintain than a company. So if you’re looking for enhanced asset protection they may be a good option. However, any losses can only be offset against future income – so they may not be suitable if you want to negatively gear an investment property.
5. Self-managed super funds (SMSF)
SMSFs can be used to buy and hold property. It’s an option that’s become increasingly popular in recent years as no tax is payable on rental income or capital gains after you retire. As superannuation funds are a type of trust, they also offer great asset protection.
However, the rules around buying property through a SMSF can be complex. Failure to follow them can result in non-compliance issues which can be punished quite severely by the ATO. They can also be time-consuming to set up and run, and you’re legally required to audit your SMSF annually.
Blaine Hattie is a commercial lawyer at Sutton Laurence King Lawyers.
As you can see, there is no one-size-fits-all solution as everyone’s needs and circumstances are different. Get the advice you need to find the right structure for you by contacting Sutton Laurence King. Call us on 03 9070 9810 or fill out this online form.