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The tax mistakes that emerge as a property portfolio grows
As property portfolios, businesses and wealth grow, the tax decisions that worked in the early years may no longer be appropriate.
Buying your first investment property can be relatively straightforward. You collect rent, claim eligible expenses and deal with the tax consequences each year.
But successful investors rarely stand still.
One property becomes three or four. A trust or company enters the picture. You may establish an SMSF, acquire a business, undertake a development or start thinking about retirement and estate planning.
As your financial position evolves, tax becomes less about recording what happened during the year and more about understanding the consequences before important decisions are made.
Here are six areas to consider as your affairs become more complex.
1. Choosing an ownership structure without considering the bigger picture
It can be tempting to focus on tax when deciding whether to acquire a property personally, through a trust, company, superannuation fund or another structure.
But tax is only part of the decision. The appropriate structure can also depend on existing assets, financing, intended use, longer-term plans and succession objectives.
Changing ownership later may result in tax, duty, financing and other costs. Structure should therefore generally be considered before you sign a contract, not after the purchase.
2. Treating every property as a separate tax decision
An established investor may own assets personally, through trusts or companies, have an SMSF and operate a business. A decision involving one asset may need to be considered in that broader context.
The question is no longer simply, “What is the tax outcome on this property?” It becomes: “How does this decision fit within my overall financial and tax position?”
3. Waiting until a property is sold to think about capital gains tax
Capital gains tax planning should ideally not begin when a sale contract is about to be signed.
A disposal may interact with other investments, ownership structures, retirement plans and the timing of other transactions.
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This does not mean an existing structure needs to change. Restructuring can create consequences of its own. The point is to consider significant transactions early enough to understand the options before they occur.
4. Assuming property investment and property development are the same thing
Buying and holding investment property and undertaking property development can give rise to very different taxation issues.
This is particularly relevant when an investor starts subdividing land, constructing properties for sale or undertaking substantial development.
The tax treatment depends on the circumstances, intentions and nature of the activities. Income tax, GST and whether amounts are treated on revenue or capital account may all require consideration. Moving into development is therefore a point to obtain tax advice before committing to a project.
5. When property wealth becomes part of a broader business picture
Many established property investors eventually become business owners. Others reach a point where their property investment or development activities become more commercial and are operated through companies, trusts and other structures.
As this happens, their tax affairs may no longer be predominantly about individual properties.
A business acquisition can affect existing structures. Property may be held alongside operating businesses. Financing, cash flow, asset ownership, tax planning, succession and eventual exits may need to be considered across the broader group.
Property Tax Specialists predominantly works with clients whose taxation and structuring needs are property-focused. As those clients grow and their affairs expand to include businesses or become more commercially structured, Business Tax Specialists provides broader tax and business advisory services that can consider both their business and property interests.
This enables the advice to evolve as the client's circumstances become more complex, rather than treating their property and business affairs as unrelated.
6. Assuming an old structure remains appropriate indefinitely
A structure may once have been suitable, but circumstances and legislation change.
Businesses grow. Portfolios expand. Debt levels change. Families change. Investors approach retirement, accumulate unrealised gains and begin considering succession and the transfer of wealth to the next generation.
Structures need not be changed regularly, but they should be reviewed against what you own now and plan to do next.
Are your current arrangements still suitable?
There is no universal “best” structure, and greater wealth does not automatically require a complicated arrangement.
If your property portfolio, business interests or financial position have changed substantially since your structures were last reviewed, it may be worth asking: Are the arrangements established earlier in my investment journey still appropriate for where I am today?
Whether your affairs remain predominantly property-focused or have evolved to include broader business interests, the tax advice and structures you require should evolve with them.
A Tax and Structure Review can help you consider whether the arrangements that served you earlier in your investment journey remain appropriate for where you are heading next.
The information in this article is general in nature and does not take into account your individual circumstances. Tax outcomes depend on the particular facts and applicable law. You should seek professional advice before acting on this information.
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