Investors should pay particular attention to the ownership structure of their property or properties as it could have a significant impact on tax, depreciation and even after death arrangements.
Blogger: Kevin Lee, founder, Smart Property Adviser
The most common ownership structures include; individual ownership, joint ownership, ownership through a trust or Self Managed Super Funds. As explained above, each ownership structure has different tax implications and each come with their own associated risks.
Ownership Structure 1: Individual
The benefits of having a property in your own name is that all of the benefits, taxes, tax depreciation and tax losses, if there are any are usually assigned to you and you only for the purpose of saving income tax.
However, people need to be aware of land tax. Land tax is a state based tax and it is assigned to the ownership of that property.
For example: If you owned 1 property in your own name and your partner owned 4 in their name, your partner could possibly be over the tax threshold in that particular state, and you wouldn’t be. Therefore it would be smarter and cheaper for you to have 2 in your name, and for them to have 3 in their name; and both of you would then be under the threshold.
A very important piece of information that I share with my clients is that land tax is savage, and it can be avoided or at least minimized if the right advice is given upfront. I would recommend that it should be ratified by an accountant before you buy a property.
However land tax is just one consideration, income and capital gains tax is another, so don’t just choose your ownership to avoid land tax, look at all of the tax implications.
Personally, my wife and I both have properties in each of our names and in some cases we also have joint ownership of some properties. That was because those properties were initially purchased as an owner occupier where we both lived and then turned into a rental later.
Ownership Structure 2: Joint
A joint ownership can be between husband and wife, two brothers or even a couple of friends who decide to buy property together. However, it is vitally important that you get the structure right as to whether it’s joint tenants or tenants in common.
Joint tenants simply means whether you’re married or in a defacto relationship with the person you are buying the property with. When you buy in this structure, if one of the married people passed away, then the other half of the property would automatically be transferred to the surviving partner.
Tenants in Common
Tenants in Common are a bit more complex as there are different types of ownership structures that come under its umbrella. Unlike the ownership structure of Joint Tenants where it’s 50/50, one person can own 10% of the property and the other person can own 90%. The person who owns 10% can therefore leave their share to anyone in their Will and the same goes for the person who owns 90%. Also, the land tax is also attributed in the way the property is owned. However, once again I would recommend this be ratified with an accountant.
As you could probably imagine, this type of ownership structure can cause some problems if one of the owners passes away. Disputes can be made over the share and how the property or properties would be disposed of. So there’s a lot of legal input into this type of structure and both parties must be aware of what they are doing and the ramifications involved if one dies or decides to get out before the property is sold.
Ownership Structure 3: Trust
There are many different types of trusts. Some of them are absolutely designed to minimize tax or in fact eliminate tax, if it is at all possible, legally or in some cases not quite so legal means.
Many banks and lenders refuse some of the more complex trusts and won’t touch them. Therefore you should be aware of the trust you are considering and if it’s acceptable by all lenders. If you buy a property in the name of a trust, you could get a nasty shock that you may not be able to get a loan for the property from the standard big four banks. You may then have to go to a non conforming lender who will charge a lot of money with a lot of fees, and ongoing costs.
Trusts are usually driven by accountants, and I guess the legal profession for asset protection. But, there are two main types of trusts. Unit Trust and Discretionary Trust:
A Unit Trust can sometimes be a good alternative to joint ownership. It can also provide the option to later transfer ownership or sell your properties (via selling your units in the unit trust) to a Self-Managed-Super-Fund (SMSF).
A Discretionary Trust provides flexibility to distribute income to the person on the lowest tax rate, so if you have one partner of a couple earning a high income, and their spouse earning no or a low income, the trust can distribute income and capital gains to the lower tax payer.
Ownership Structure 4: Self-Managed-Super-Fund (SMSF)
There are three main types of superannuation funds; personal, employer initiated and self-managed. But I would recommend you focus on Self-Managed-Super-Funds as it allows you the most flexibility and options to owning investments like property.
Superannuation is tax effective and provides an incentive for people to save up for and fund their own retirement income – a more in-control approach than relying on government assistance. However borrowing through super was banned in 1999 and since being reintroduced in 2007, more flexibility and options have become available in terms of property ownership through super. Please note that these are subject to specific rules.
According to The Association of Superannuation Funds of Australia, in February 2013, $1.5 trillion is accumulated by super assets nationwide and $476.2 billion was contributed to super. But there is a limited amount of money that can be contributed to superannuation. Therefore you should not leave your super until you are 60 years of age to take advantage of its benefits.
Unlike the abovementioned ownership structures, SMSF ownership is a tax structure in which you can pay less tax on your investments if you purchase those investments via your SMSF. Also, a SMSF can have up to four members, so you can combine resources with your spouse or partner, which is also beneficial when investing in property.
As explained above there are numerous ownership structures that you can take advantage of when investing in property. I personally have used individual and joint ownership structures as they have suited my situation and what I wanted to achieve.
My recommendation is that for whichever ownership structure you decide to use, ensure you do the required research into the ramifications, limitations and legalities surrounding it. Also, ensure that you consult a trusted finance adviser before making your final decision. But when you do seek out an expert, ensure that the advice they give you is unbiased and in your best interest.