When purchasing an investment property, or any investment asset for that matter, you should consider whether you are purchasing the asset in an appropriate structure. If the appropriate structure is not established from the start, it can end up being very costly and restructuring may not be a viable option.
Structuring your investment
Unfortunately, there is no “one structure suits all” approach to owning an investment. You should consider several factors when making any investment decision, including the following:
- Asset protection
- Income tax efficiency
- Ability to borrow within the structure
- Tax efficiencies on disposal of the asset
- Succession planning
Popular structures for holding investment properties include:
- Ownership in an individual name
- Ownership in a family discretionary trust
- Ownership in a self-managed super fund
Investment properties are commonly held within these structures as they are entitled to the general discount on any potential capital gain generated where the asset is held for more than 12 months. A company structure does not enjoy such a concession. For individuals and trusts for example this may result in any capital gain being discounted by 50% and you only pay tax on half of the gain.
Protecting your assets
As a young doctor starting your journey in the medical field you will see your circumstances change both professionally and personally. You may start out employed as a registrar in a practice and continue in this position for some years before moving into a role where you operate as a sole trader. If you do start operating as a sole trader, you may expose risk to your investment assets if litigation is brought against you personally. Your investment property could be exposed as a personal asset. If you have a spouse, they may have a lower risk profile or generate lower assessable income each year which may support the notion of acquiring the property in their name.
Alternatively, you could consider holding any investments in a protected entity such as a family trust which also gives the flexibility to potentially direct income to various family members. Each year, the trustee can resolve to distribute the income and any capital gain on the potential disposal of the property to beneficiaries as they see fit. As an extra level of asset protection, a company could act as a corporate trustee of the trust. This can also assist with potential succession planning as individuals such as adult children can be added as directors of the company, allowing them to take effective control over the trust. This is unlikely going to result in transfer duty whereas if you held the property in your own name and transferred it, they would likely incur transfer duty on the transaction.
Positive or negative gearing?
Another consideration when owning an investment property is whether it is positively or negatively geared. Positive gearing refers to the situation where the income received from the assets (the rent collected) is greater than the costs of owning that property. Negative gearing conversely occurs when the income is not sufficient to cover the costs of maintaining the property. Depreciation for tax purposes can also result in an even larger loss.
As an individual, negative rental losses can be offset against your employee, business or other income which can help reduce your tax. There may therefore be a benefit in holding the property under your name as an individual if asset protection issues and other factors are not a concern. If you are generating higher income than your spouse, you will likely see better tax savings each year holding it in just your own name or if you hold the greater percentage. However, there is not any flexibility to divert any capital gain; rather most of the gain will be taxable in your name where you may be paying the top marginal tax.
In a trust structure, any tax losses incurred due to the negative gearing are not able to be distributed to beneficiaries. The benefits of negative gearing would not be realised each year, and rather carried forward to offset future income in the trust. If your trust also invested in other investments that were positively geared such as say shares and dividend income, then the rental losses could be offset against this.
Purchasing a property through your SMSF
Self-managed superannuation funds can also be utilised to purchase properties. There are additional complexities and regulations around holding properties in self-managed superfunds and borrowing within this structure can be challenging. This structure is often used to take advantage of the lower tax rates and concessions once you meet pension phase. You should seek financial advice around whether a self-managed super fund would be appropriate in your circumstances.
As mentioned above, there is no “one suits all” approach when investing in property. There are a lot of different details that need to be assessed to make the most out of your investment.
If you are considering purchasing an investment asset, contact a William Buck advisor to determine an appropriate structure for you.