Whether you hold an investment property in your own name, a company or a trust, your unique circumstances will determine whether you’ve made the right decision or not.
You can determine the best way to hold an investment property by having a general understanding of the taxation implications of owning an investment property and applying them to your unique circumstances.
In other words, there is no one investment structure that works for everyone and you would need to consider which investment structure works best for you.
Will the property be negatively or positively geared?
The first question you will have to ask yourself is whether the property will be:
- negatively geared, whereby you make a loss at the beginning of your ownership period; or
- positively geared, whereby the income generated from the property exceeds the property related expenses you incur.
If the property is negatively geared, the owner of the property should be a high-income earner. In other words, the owner should be someone who is subject to the highest marginal tax rate. Consequently, the high-income earner will be able to offset their losses against the income they derive.
That being said, your investment property will often start out as negatively geared and become positively geared. Where this occurs, the high-income earner would ordinarily acquire another negatively geared property. This ensures that they are able to again capitalise on negative gearing, until they build their property portfolio.
If the property is positively geared, you will want the owner of the property to be a low-income earner. This ensures that you can minimise the tax paid on rental income derived from the property.
Should I own property in my personal capacity?
If you own property in your personal capacity, you will:
- not obtain adequate asset protection as the property forms part of your estate which may be liable to claims from third parties;
- not be able to distribute profits to family members;
- pay tax on rental income in accordance with your marginal rate of tax;
- have access to the land tax threshold;
- obtain the benefit of the 50% CGT discount on disposal of the property.
Should I own property in a company?
If you own property in a company, you will:
- achieve asset protection by quarantining assets held in the company from assets held by the shareholders;
- not be able to split income to anyone other than the shareholders;
- be able to accumulate profit in the company;
- access the low tax rate of 30%;
- have access to the land tax threshold;
- not obtain the benefit of the 50% CGT discount on disposal of the property.
Should I own property in a discretionary trust?
If you own property in a discretionary trust, you will:
- achieve asset protection by quarantining assets held in the trust from assets held in your personal name where you appoint a company to act as trustee of the trust;
- be able to distribute any portion of income to any of the beneficiaries of the discretionary trust;
- have income is taxed at the beneficiary level, meaning the tax paid on income derived from the property will be nominal only where the beneficiaries are low income earners;
- not have access to the land tax threshold which means the trust will pay more land tax than an entity that does receive the land tax threshold;
- obtain the benefit of the 50% CGT discount on disposal of the property.
Should I own the property in a unit trust?
If you own property in a unit trust, you will:
- achieve asset protection by quarantining assets held in the trust from assets held in your personal name where you appoint a company to act as trustee of the trust;
- not be able to distribute income to anyone other than the unit holders;
- have income taxed at the unitholder level, meaning the tax paid on income derived from the property will be nominal only where the unit holders are low income earners;
- not have access to the land tax threshold unless the unit trust is a fixed trust for land tax purposes; and
- obtain the benefit of the 50% CGT discount on disposal of the property.
Read our insight on ‘How to access the land tax threshold in a trust‘ to see how your trust can access the land tax threshold.
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