The essential ‘Ps’ of the property game

Today, I’d like to tackle the “P” I call platform. 

What is platform?

Platform refers to the ownership structures you can use when building a portfolio.

There are several entities available to investors and each has its own advantages and disadvantages.

Individual/personal ownership

This is far and away the most common ownership option because first-time buyers naturally look to purchase an asset in their own name.

It’s the simplest from an administrative standpoint, too. Unlike other more complex legal structures, you don’t need high-level accounting or legal advice for transacting or administration. Nor do you need to provide ABN, ABS, or similar information in advance of an auction or when making an offer.

Individual ownership also delivers a level of satisfaction. There’s nothing quite like the first time you see your name listed as an owner.

Also, if you’re a first-time purchaser who will live in the property before converting it into an investment, buying in your own name allows you to claim first home owner grants and other discounts on things such as stamp duty and rates.

There’s also the ability to negatively gear your property and help reduce your tax burden each year. This is particularly great if you are a high-income earner and don’t plan to sell until after retirement.

While self-ownership is a safe option, there are downsides to choosing this as opposed to purchasing under another structure.

The disadvantages of individual ownership are mostly around flexibility when it comes to taxation and accounting.

All income and profit derived through rental or sale will be attributed to you as the owner. There is no ability to assign any of the proceeds to a spouse or dependant to reduce your tax burden.

So, if you sell your property in the future and it’s doubled in value, expect the applicable capital gain to be applied to your annual income for tax purposes. Mind you, as an individual you will normally be eligible for a 50 per cent discount on the capital gain amount.

Also, individual ownership provides no asset protection. If, for example, successful legal action was brought against you, your assets could be sold as part of a settlement.

The other problem for some owners is privacy. If you prefer to fly under the radar, then buying in your own name is not the way to do it. Your details will be listed on various portals and with data houses as the owner.

Company ownership

A company is a controllable but separate legal entity you and others can hold shares in. It’s very useful for asset protection as it provides an ownership insulation layer between you and the property.

You must remember that any income generated by the property will be taxed at the company tax rate, which is around 30 per cent, so this will need to be factored into your considerations.

There are costs in setting up a company and its accounting and administration are more complex than individual ownership. As such, ongoing fees for professional advisory and management must be allowed.

Another element is that company structures don’t get CGT discount benefits in the same way individual owners do. There are strategies that can assist with minimising CGT in a company — particularly around a development venture — but they will require solid accounting and legal advice to maximise the outcome.

Trusts

Trusts themselves aren’t separate legal entities like companies. A trust is more of a “vehicle” for wealth distribution. There is a relationship between the trust, the controlling trustee, and the trust beneficiaries.

The two main types of trusts are unit trusts and discretionary trusts.

Unit trusts define a pre-proportioned entitlement to each trust beneficiary. They’re commonly used in business relationships between unrelated parties.

Discretionary trusts are slightly different and are particularly popular with family groups. This is because a discretionary trust has the ability to distribute profits and capital gains among all the beneficiaries in any fashion. So, come tax time, the rental income from the trust’s assets can be apportioned to whichever beneficiary had the lowest annual taxable income, thus reducing the overall tax liability.

Trusts, like companies, also afford a layer of asset protection for the controlling trustees.

Also, a trust can be eligible for CGT discounts. That said, it cannot claim a first home buyer’s grant. Also, any losses generated in a trust can’t be offset against your taxable income.

Self-managed superannuation fund (SMSF)

As the popularity of SMSFs has grown, so too has property investor participation within the structure.

But the education process on this has been a long one. In fact, I’d say more than half of the investors I first talk to are unaware that property can be purchased in an SMSF. That’s a huge opportunity lost for some.

Your SMSF will build up over the years to become a useful source of capital to help grow your wealth in a tax-effective way. This store of funds can often be used as the deposit for a property purchase.

The tax regime surrounding SMSFs makes them very attractive, with tax on superannuation being just 15 per cent. This drops to just 10 per cent after the asset has been held for 12 months. You can also reduce your tax burden by making pre-tax contributions to your SMSF.

There are a few disadvantages, however.

For starters, SMSFs are governed by strict legislative guidelines. Their establishment, administration, and compliance are rigorous and often complex, so you will need professional assistance.

Also, you don’t gain any negative gearing benefits from an SMSF and you’re not allowed to have any personal interest in the property, so you couldn’t rent it out to a relative, for example.

As you can see, there is a range of ownership platforms for buying an investment property. Which of these will deliver the best outcome is wholly dependent on your own circumstances. You should, therefore, rely on the advice of a trusted property professional to help select the entity that best suits your needs.

Colin Lee is the founder and chief executive at Inspire Realty and a member of the Property Investment Professionals of Australia (PIPA). 

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