The question of whether to place property under personal, company, or trust ownership is the most advantageous? This is a common issue for property buyers in Australia when purchasing real estate, and it's also a question that many property buyers lack knowledge about. Therefore, understanding the characteristics of ownership structures and their advantages and disadvantages will help property buyers make the most correct and profit-maximizing choice.
Personal Name
One of the most common ownership structures is to purchase property in your own name or jointly with others. This individual ownership structure can offer many direct benefits. Individual ownership structures also come in two forms: Tenant in common and Joint Tenant.
Tenant in common
Tenant in Common can nominate to own different proportions of the property. These proportion can be equal or unequal. Tenants in common have their share in the exact amount of the stake they own. For example, a tenant with a 60% share in the property only owns 60% of that property.
Tenants in common do not have an automatic right of survivorship. Tenant in common can sell or transfer their shares without consent from the other tenant or tenants.
The major benefit of Tenants in Common is that you can elect the proportion of shares in ownership that you and the other tenants have. This offers greater flexibility for individuals looking to invest in property with at least one other person.
Tenants in Common is also an appealing option for individuals who want to distribute their interest in a property amongst other beneficiaries in a Will rather than the other tenant or tenants.
Joint Tenant
Joint Tenant own property jointly and equally and have 100% stake in the property. Joint tenants have an automatic right of survivorship. Joint tenants cannot sell or transfer their share without the consent from the other tenant.
One of the main benefits of Joint Tenancy is the automatic right of survivorship. It’s generally simpler and less expensive to transfer an individual’s interest in their property to a joint tenant upon their death in comparison to a tenant in common.
Another potential benefit of Joint Tenancy is that the parties hold equal and joint ownership of the property.
Pros:
The benefits of owning your property in your own name is, it is more cost efficient to set up and maintain. You can gain the full access to negative gearing benefits, eligibility for a full CGT discount and first home buyer grant, and possible land tax saving.
Cons:
Owning property in your name limit your asset protection capabilities, particularly if you are in business for yourself. If your property is positively geared, all of the income has to be declared in the name of the individual/s who own the property, meaning that almost half of profit will be taken by tax.
Company Name
The popularity of real estate investment through a corporate structure has seen a decline. Purchasing investment properties through a company has become less common, primarily because companies do not qualify for the 50% capital gains tax discount that individuals can obtain after holding a property for more than 12 months.
Pro:
Owning a property within a company structure increases asset protection since company have Limited liabilities. If the property is positively geared, the income tax payable within the company is capped at 30% which is much lower than the effective 49% individual top marginal rate.
Cons:
Establishing and maintaining a company comes with ongoing expenses. While companies have a capped income tax liability, the positive returns generated by the property might result in greater losses without the 50% capital gains tax discount, especially when real estate appreciates significantly in value.
Trust Name
Real estate investment within trust structures is an avenue of interest for many Australian property buyers. You can purchase property within two main types of trusts: unit trusts (sometimes referred to as fixed trusts) and discretionary trusts (sometimes called family trusts).
Pro:
The benefits of trusts include increased asset protection, especially when using a corporate trustee. When your loan structure is set up correctly, you can also gain negative gearing benefits from unit trusts.
Additionally, trusts are typically eligible for a 50% general capital gains tax discount. More importantly, if you use a discretionary trust, you can decide each year who receives the trust's income. This can be an advantage when trying to distribute income in the most tax-efficient manner.
Cons:
The drawbacks can include the costs to set up a trust, as well as increased ongoing costs, differing land tax rules depending on the state, and negative gearing benefits can be hard to access, particularly using a discretionary trust.
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