If you are considering purchasing an investment property, it is imperative to receive expert legal advice. Contact our Adelaide Property Lawyer, Dimitri Panayotopoulos for timely advice.
Property is still regarded as one of Australia’s safest long-term investments with an overwhelmingly large proportion of Australians still preferring to invest their savings in property over other investment strategies.
Investing in bricks and mortar might seem like a standard affair, but there are numerous factors which you should consider before finalising any agreement for the purchase of an investment property.
This article will consider one of those important factors – in whose name should I purchase my investment property?
There are three (3) main ways to record ownership in an investment property; by way of individual ownership, company ownership and family trust/self-managed super fund ownership.
Individual ownership is by far the most common form of ownership for ordinary Australians to choose when investing in property. Individual ownership is where a natural person, or a number of natural persons, owns the land, and is recorded quite simply through the placement of a person’s name on the Certificate of Title as registered proprietor.
The benefits of individual ownership include:
Easy access to finance:
As a natural person with a wage, it will be relatively easy to obtain a home loan for the purchase of a residential property. Most financial institutions are willing and able to fund 80-90% of the purchase price if you are able to provide evidence of a recurring source of income and show that the value of the property is equal to, or in most cases, exceeds the loaned amount.
Tax Benefits & Grants:
Land tax is not payable on the family home so long as it is your principal place of residence. Also, capital gains tax is not payable on the sale of the family home so long as it has remained the principal place of residence for the owners throughout the period of ownership. Unfortunately, if you are purchasing property as an investment, you will generally be liable for the payment of land tax and capital gains tax when the property is sold for a value greater than the initial purchase price. As a natural person, you may also be eligible for the First Home Owner’s grant and the ability to negative gear. It is prudent to speak with a financial planner or accountant prior to investing in property, so that you can more accurately determine your tax liability and grant eligibility.
Inheritance and Transfers:
A property owned as an individual can be transferred between spouses or domestic partners without stamp duty required to be paid.
This form of ownership also allows for the simpler construction of Wills, and allows property to be transferred to the beneficiaries of an estate without the accrual of any stamp duty.
Many people, however, fail to observe the restrictions individual ownership places on the investment asset:
There is minimal asset protection afforded to those wishing to invest in property. This form of ownership allows for the equity in the property to become the target of litigation in both family and debt collection matters. In many jurisdictions across Australia, creditors have the ability to force the sale of property owned by an individual to satisfy debts, or can place a ‘charge’ over the property to prevent its sale or further dealings. The risks posed by litigation can be minimised by buying the property in another person or entity’s name, but this is seldom recommended unless you have an ongoing relationship with that person or entity.
In some situations, a financier might require that a loan over the property be cross-collateralised. This means that the loan over the investment property extends over both the investment property and another property you may own (ie, the family home). In this situation, the financier has the ability to recover the loan amount from either the family home or the investment property, or both, exposing an individual investor to substantial risk in the event of default. We recommend speaking with your financier to negotiate a separate loan for the investment property which does not list your family home as security.
A company is a separate legal entity capable of holding assets in its own name. A company is owned by shareholders, and the directors manage the company’s day to day business and affairs. The shareholders of a company receive any company profits in the form of dividends. Many people choose to invest in property through a company due to the significant benefits afforded to them, including:
A company has the ability to trade in its own right, and can engage in most activities a natural person would normally be able to. In the event of liquidation, receivership or administration, shareholders can limit their personal liability and are not generally liable for a company’s debts. Instead, the financial liability of the company is limited to the company assets. In this respect, if you purchase and investment property through a company (and you own shares in that company), you as a shareholder will generally be exempt from any obligation to repay the debts of the company, thereby safeguarding any personal or family assets. This can allow you to protect your personal assets, such as the family home, from exposure to your investment dealings within the company.
Companies in Australia have a set tax rate which in many instances, is below the income tax rate payable by an individual. If an investment property generates rental income that falls within the highest income earning tax bracket, the company that owns that property will still be eligible to pay tax at the company tax rate. After profits have been taxed, the company can distribute the profits to shareholders by way of dividends, and has the option to ‘frank’ the dividends to further reduce the shareholders tax liability (you receive the dividends with the majority of the tax already having been paid!). In this respect, rental income from the investment property can be taxed at a lower company tax rate than your own personal tax rate, and can result in higher net cash flows from the property. Again, we recommend speaking to your accountant or financial advisor to determine your tax liability and whether a company structure best suits your needs.
Although this form of ownership substantially minimises any exposure to liability, there are significant compliance costs and disclosure requirements that should be considered and weighed up against the potential benefit.
TRUST & SUPER FUND OWNERSHIP
A trust is a fiduciary arrangement that allows a third party, the trustee, to hold assets on behalf of a beneficiary or beneficiaries. The most common form of trust in Australia is the family trust, also known as a discretionary trust. A self-managed super fund (SMSF) on the other hand, is a superannuation trust structure that provides financial remuneration to its members in retirement. The main difference between SMSFs and other super funds is that SMSF members are also the trustees of the fund. Purchasing a property through the use of a trust carries significant benefits, including:
By virtue of a family trust, a trustee company buys the investment property on behalf of the beneficiaries, and acquires financing in the trusts name. In the event of default or litigation, the trustee company is sued, not the beneficiaries of the trust. Likewise, if a beneficiary of the trust is pursued for outstanding debts in their own names, the creditor cannot seek to satisfy the debt by claiming trust assets. This is because beneficiaries of a trust do not have any ownership rights in the actual trust assets.
Trusts are unique in the fact that they allow for profits to be split or divided in different ways each year. For example, a trust allows for rental income from an investment property to be divided amongst beneficiaries in a way that allows for minimal income tax to be paid by the beneficiaries. In this sense, a low income earner who is a beneficiary of the trust can receive the taxable income from the trust and take advantage of a lower income tax bracket. SMSF’s on the other hand, have a fixed income tax rate substantially lower than any standard personal income tax rate (some 15% pre-retirement, and 0% post retirement). In this respect, SMSF’s may be ideal for investors seeking to purchase an investment property for their retirement.
Trusts and the rules surrounding SMSF’s are very complex, and we suggest you speak to a financial planner and solicitor prior to embarking on this course.
Although purchasing a property in your individual name is incredibly simple, you should consider purchasing a property in a family trust for increased asset protection and tax flexibility, or through an SMSF for a tax effective retirement nest egg.
Georgiadis Lawyers excels in providing competent property advice that suits your situation and needs. Please contact our Adelaide Property Lawyers for a no obligation Free First Interview to discuss your property and business requirements on (08) 8210 5400.