Choosing an ownership structure is a huge part of making sure your investment is successful – yet so many investors become so focused on finding a property that they give little to no thought about what structure they want to put into place!
Like with everything else on your property journey, there is no one-size-fits-all approach or strategy that will equal success. Which structure is best for you will be completely determined by your personal circumstances and future goals with the investment.
When deciding which structure to choose, there are a number of things you should consider. These include:
Asset Protection
Life is full of surprises, and they’re not always good. The more people you have dealings with, the higher your chances that you will eventually run into some form of legal dispute, which might put your hard-earned assets at risk.
Tax
I’ve mentioned this before and I’m sure I will mention it again, but you should never use tax benefits as the sole reason for purchasing a property, OR for structuring it in a certain way. Having said this, you do need to consider it as part of your overall decision. If you choose a tax efficient structure it will ensure that the overall taxation position of your group is optimised.
Succession
Having just spoken about wills, you should know now how important it is that it’s clear what we want to happen to our assets – including investment properties – after we die. You need to consider how you want your nominated people to inherit and manage your assets.
Costs & Complexity
It can be easy for your structure to evolve over time as you take on new investments and make new deals. You have to be aware that adding extra entities to an existing structure may end up costing you. Structures can be as sizeable and complex as you want, but the more complex a structure becomes, the higher the associated costs of it will be.
Now, there are a number of different ownership structures you might like to choose from, including individual, company, trust, partnership and SMSF. To help you decide which structure to choose, I’ve put together some information regarding each of the 5 you have to choose from, and outlined pros, cons, and what circumstances they are suited to. Read on to learn more!
1. Individual
This is the most popular option among investors and it’s not hard to see why – it’s the simplest and the cheapest! While owning an investment property in your own name may not provide asset protection, any negative gearing losses from the property are able to directly offset your income.
2. Company
A company is considered to be a separate legal entity when it comes to the law. If you decide to set up a company in order to purchase an investment property, you yourself do not own the property, your company does. If you get sued, the property will not be at risk as it legally does not belong to you, but rather the company. In saying this, whoever owns the shares in the company will indirectly own the assets of the company. So if you give all the shares to someone who is a high risk, the structure may not uphold the intended asset protection feature.
3. Trust
A trust is essentially a relationship under which the trustee looks after the trust’s assets for the benefit of beneficiaries. A discretionary trust that is set up correctly has the potential to offer a reasonable amount of asset protection. This is because the beneficiaries of the trust are usually not entitled to the income or capital of the trust until the trustee makes a resolution to distribute it. A high-risk person may use a discretionary trust to buy property as if they get sued, the creditors do not have access to the assets held in the trust because no one currently has a beneficial ownership of them.
4. Partnership
While a company is a separate legal entity, and a trust is a legal relationship, a partnership is a contractual arrangement which dictates that at least two parties carry on business in common with a view to gain profit. It’s important to note that two people who jointly own an investment property will be considered as a tax law partnership for income tax purposes.
5. Self-Managed Superannuation Fund (SMSF)
The idea of a self-managed super fund may seem foreign, complicated and overwhelming to you, which is fair enough. That’s why I’m here – to help you break through the jargon and fully understand what the concept is and how you will use it!
The first thing you need to know about SMSF is that you can only buy property through your SMSF if you comply with the following rules:
Your Property MUST:
Meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
Not be acquired from a related party of a member
Not be lived in by a fund member or any fund members’ related parties
Not be rented by a fund member or any fund members’ related parties.
Your SMSF could also potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.
At the end of the day, there are pros and cons of each structure, and what you choose will depend on your circumstances. That’s why I recommend always consulting with a qualified accountant that specialises in investment structuring to ensure you are choosing the right structure for YOU. If you’re not fully aware of all the implications of each structure, it’s easy to choose the wrong one which can cost you greatly!
Until next time,
Sasha.
