Great forum, with lots of good advice. I've been lurking for a long time & decided to join so I could ask some questions.
I'm trying to determine the best structure for my first investment property. I've been advised different things by different people. Either a trust or company or my own name. The logic was to use a company so that I can claim more expenses as a tax deduction. Or setup for the longer term with a trust.
I'm married with 1 child, wife not working (so I was thinking she could work for the company doing the books etc.), I earn about $150k, so I'm very keen to get some taxs savings.
Can anyone point me in the right direction where I can find some information about the Pro & Cons of each or should I just talk to an accountant ?
Thack.EvolveMember@evolveJoin Date: 2009Post Count: 66
Yeah – this is a pretty common question.
Lets look at the options:
1. Buy in your personal name:
– if negatively geared then you will reduce you taxable income and save you 37 cents in the dollar (plus 1.5 cents medicare) for every dollar the property is costing you – this is good and could even make it cash flow positive once you take into account depreciation etc
– When you sell, if there is a capital gain then you will get smashed with capital gains tax because the net gain (after 50% general discount) simply gets dumped on top of your already high income and gets taxed at that rate – and based on your current income it wouldn't take too much to push you up into the 45% tax bracket ($180k plus) – this is bad
– if you have job where there is a possibility of someone trying to sue you, then having assets in your own name is not good as it puts them at risk
2. Buy in a companies name
– No CGT discount – this is very bad for a long term capital appreciating asset like property
– Doesn't help your personal tax situation
3. Buy in the name of a trust
– Great for positive or neutrally geared properties as you can distribute the surplus income to beneficiaries on a lower tax bracket (such as your wife or $3333/yr to your kid)
– CGT discount available (provided distributed to an individual)
– Not so good for negative gearing
4. Hybrid trust / property trust
– If correctly structured with the right loan / lending set up you could get the best of both worlds – i.e. deductions on a loan in your personal name but ownership held in a legally separate (protected) entity with the ability to distribute future income and capital gains in a tax effective manner to lower taxed beneficiaries
– essential to be set up correctly
5. Self managed super fund
– best possible tax treatment (15% on income 10% on capital gains – or 0% for both if you are in retirement)
– negative gearing benefits available via salary sacrifice
– you likely already have amounts in super that can be used as a deposit
– flexibility to do a combination of bank finance (in SMSFs name) and member finance (you on lend to the SMSF also) which will enable you to re-coup some capital back into your own name via the SMSF repayment the member loan back to you
– excellent asset protection
– you can't re-borrow from any built up equity and use it for further property deposits – you need to sell and realise the gains/ profit to fund further investments to get the snowball effect happening
– higher initial upfront and ongoing costs
– ability to utilise other family members within the SMSF to gain access to profits before you retire* – so it is not locked away
*old person to be member of your SMSF sold separately
The above if a very basic overview based on the information you have provided.
You will need to seek paid professional advice to ensure you get the structure right – it will costs too much to change it down the track.
If you have any questions please throw them out for myself and other forum members to respond.
EvolvePC_MelbourneMember@pc_melbourneJoin Date: 2010Post Count: 43
If your objective is tax savings, then buy it in your name, as your name is where the salary lands and where the income tax occurs.
If your objective is to minimize your tax, then focusing on expenses will do little to dent the tax you pay.
From what I understand, as long as the property is earning an income, the expenses are deductible on that property against the entity that owns it. The differentiator is just how troublesome those expenses are to claim.
For Tax Savings, I would recommend the following structure:
1) Setup a Family Trust – For this to be useful, your employer would need to agree to pay this entity your salary.
> This Entity’s sole purpose is to take in your income, and distribute to family members.
> Your wife and child can be recpients of income distribution and pay the tax on the tax bracket of what is distributed
> Even before property, this is helping with tax minimization
2) Get the IP in your name, knowing you will distribute most of the income to your name.
> Strategize for purchasing not 1, but perhaps 3 Investment Properties.
> The Expenses again are relatively low, and barely worth the hassle if thats what you want to recover
> But the Depreciation claims on new IP will have a significant impact on your income tax
> Depreciation claims are the only portion of money in IP that you didn’t physically have to pay for to get back so it works well.
We just did this recently and are paying next to nicks in income tax.
In your personal names, then there is no asset protection.
The greatest asset protection is with a discretionary trust. But the disadvantage with a trust is that losses are not able to be used to offset your personal income. However this may only be a short term problem as rents will hopefully grown. Once the property is making a profit then a DT will be the best for minimising tax payable as Evolve mentioned. This year it may be possible for an adult to earn up to $16,000 without paying tax – using low income tax rebates. So this will be a great savings.
Thanks everyone for the comments. Greatly appriecated. Gives me lot s of good things to think about & discss with a good Accountant (when I find one.) I hadn't really considered the SMSF, but I do have over $100k there avaiable to pay with.
I had read (in a US book) that an Limited Liability Company (LLC) could elect to be tax in a way that allowed negative gearing (as could an S-CORP). Is this not possible in Australia ?
PC_Melbourne, did you do 1 or 2 ? Would many employees allow you to be paid into a family trust ?
In Australia different companies, trusts, smsf and individuals are generally separate entities for tax purposes and so the loss of one is generally not available to offset the income of another.
If a company has other income it could offset the loss of a negative geared property against this income, but this would be extremely risky from an asset protection point of view.
Structure is an important component as is time frame, long term intentions, type of property, do you intend to build a multiple property portfolio, etc.
As Evolve outline very well, there are a number of different structures to use. It is costly if you think you need to change half way but that doesn't mean that you can't use multiple structures. Often for PAYG employees, buying the first 2 to 4 IP's in their own name can work very well, then you use a discretionary trust after that – essentially after you have reduced your personal income tax down to low levels. I agree with Evolve, do not use a company to hold property in.
Unless you are 50 years plus, a SMSF is restrictive and it does not sound as if you have sufficient funds under super anyway to consider using it. There are other posts on the use of SMSF's to get a view of why and when to use.
For an employee with the level of salary you have, I would look at newer properties and also consider buying in the ACT for the one off benefit of claiming stamp duty on the lease purchased. As to whether it needs to be new or established will depend on the level of cash or equity you have available to settle the purchase. The choice of which state to purchase in needs to be factored in as well, each have different stamp duty rates and on different properties. The characteristics you need to consider for the first IP will be determined by your circumstances and your goals and time frame. You need to match the property type to benefit you to be able to purchase the second IP if that is your goal.
As to an accountants advice, more than likely you will get better advice here by experienced investors. I am an accountant by profession for over 30 years and the level of knowledge by most accountants in respect of property investing is sadly lacking and often bordering on incompetence.
GregSAFParticipant@scorpio19Join Date: 2010Post Count: 3
I am new to the site. I was following this thread. Great summary of the various options Evolve! We are looking at buying our first IP. Our FP has suggested MGS (Macquarie Group Services) Unit Trust products. I am still reading through the docs and tyring to understand the ins and outs of a "NSW Land Tax Unit Trust (NSW)" and a "Standard Unit Trust". Thoughts???
Thanks very much
Create Your Own LuckGratitudeMember@gratitudeJoin Date: 2010Post Count: 2
I think l need to set up a trust? What do others think? How much and how difficult would it be to change our existing financial structure.
My husband and l own 3 properties together. We have an equal share in assets and the properties were purchased in our Individual names in our early twenties.
Property 1 – Owners Home is owned outright
Property 2 – Investment is owned outright and rented
Property 3 – Investment Is mortgaged and rented. We owe $240k
My husband has just started working as a sole trader and we want to minimise our financial risk to our assets as a result of something going wrong in his business.
If you wish to transfer the properties now you will be up for stamp duty, CGT, legals and there will be little benefit of asset protection, especially for the next 5 years.
It would be a good idea if your husband ran his business thru a company rather than a sole trader as this will provide more protection.
Depending on your state you live in, you may be able to transfer the assets into your name. Whether that makes sense from a tax perspective needs to be answered for the IP's but you certainly could for the PPOR.
I agree with Terryw, if you are up for stamp duty and CGT, it may not be the wisest move. A company for a business is often a good vehicle and you could arrange ownership and directors according to your needs and that can include asset protection to an extent. If your husband is not a director, you obtain appropriate risk insurance you may be able to mitigate the risk.
Another option is to load up debt secured against the properties so that there is little benefit for great cost to take action against your husband personally. Obviously you use the equity released wisely.
There are options to consider.
Yours is a different issue. My view is that the use of a unit trust will restrict you in lender choices. Your FP may have good reason for the MGS unit trust but it is not immediate apparent to me unless you have a need for unit type holdings with others.
As you are on a property investing forum, I presume you are interested in a legal entity to hold property in and nearly all lenders are comfortable with discretionary trusts. Why restrict your ability to borrow if there is not a compelling reason to do so?
I am not sure as a general rule that FP's know much about trust structures (some will), I would get a second (or third opinion) from a good accountant.
GregGratitudeMember@gratitudeJoin Date: 2010Post Count: 2
Thanks Greg and Terry for your advice.
Yes , we certainly want to avoid paying stamp duty and CGT.
l think l have ruled out a trust fund seems very expensive with little benefit.
Setting up a Company seems like a headache and costly too considering his business is predicted to make between 20- 30k as he is only working it partime.
Decisions, decisions…. more research required on my part thanks again
Trusts may costs a little to set up and run, but the benefits are great in the long run. It may not pay to transfer existing assets however.
Also consider the limited liability benefits of a company.
Thanks again all for the comments & great advice.
Evolve could you or anyone else that know elaberate on your comment in 4. Hybrid trust / property trust
"4. Hybrid trust / property trust
– If correctly structured with the right loan / lending set up you could get the best of both worlds – i.e. deductions on a loan in your personal name but ownership held in a legally separate (protected) entity with the ability to distribute future income and capital gains in a tax effective manner to lower taxed beneficiaries"
What is the structure needed to achieve this ? Is there any info you could share or point me towards ?
ThackRichard TaylorParticipant@qlds007Join Date: 2003Post Count: 11,992
When Evolve has answered the question then ask how many lenders will lend to such a structure.
Off the top of my head i am only aware of 3 and non of these offer attractive products.
I am not sure it would be possible to have person A claim the deductions and then person B get all the income or the CGs. There would be not commercially viable reason for A to borrow to buy the units if A wasn't guaranteed the income from the trust.
It could be set up with A claiming the interest on their purchase of the units and then later transferring those units back to the trust – it could revert to a discretionary, but then you would have CGT issues/
Hybrids have their drawbacks, but are still worth considering.
Is there anywhere the outlines the different rules that apply to Trusts or different structures & tax strategies for investing ? Any book you could recommend ?Thack wrote:Is there anywhere the outlines the different rules that apply to Trusts or different structures & tax strategies for investing ? Any book you could recommend ?
I think you will find it is way too complicated for a book to cover it all and be up to date. Things, especially in tax, change rapidly.
You will need a good law book to cover the legal aspects and a different one to cover the tax aspects.
A couple I have are:
-The Trust Structure Guide by Harwood Lawyers
-Drafting Trusts and Will Trusts in Australia by Kessler???
-Trust Law in Australia by Ong
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