Investing and ownership structures – What do you need to know?

Written by Michael McKenzie on March 29, 2021. Posted in Uncategorized

Many Australians go for property ownership as their investment method of choice. While investing in the real estate market is common, many first-time investors will be surprised to learn that the ownership structure they choose for their new property can have a notable impact on the returns they see on the investment.

Like most decisions you’ll make regarding the property market, there is no one-size-fits-all guide to choosing an ownership structure. You’ll need to take careful consideration of your circumstances and seek out expert advice to find the option that suits you best.

Some ownership structures are more common than others, though, and understanding these is a great place to start.

Individual
By far the most common and straightforward form of property investment, individual ownership means that all of the benefits, losses, and repayments are your responsibility alone.
This property investment type can be used to offset losses against your income through negative gearing, though it offers little asset protection.
Individual ownership is most suitable for first- and small-time investors and high-income earners.

Joint tenants
Couples or spouses most commonly choose a joint ownership structure, but it can work just as well for friends or relatives. Functionally, joint ownership works very similarly to individual ownership. Both you and your co-owner are equally responsible for the property, repayments, and losses, and each will benefit from any gains. When choosing a joint ownership structure, you can specify the percentage of ownership for each involved party. Upon either party’s death, ownership of the property will be transferred to the surviving individual unless there is a will in place specifying otherwise.

Company
Choosing to purchase an investment through a company means that you, as an individual, do not legally own the property. If you were to be sued or declare bankruptcy, the property would not be affected, making this ownership structure a desirable option if you’re concerned about protecting your assets.
However, all income earned through the investment is subject to a flat tax rate of around 30% and must be divided among the company’s shareholders. A company ownership structure is suitable for those looking at property investment as a long-term strategy.

Trust
Although there are multiple types of trusts used by those looking to invest, family and unit trusts are most common. Offering more asset protection that individual or join ownership, purchasing through a trust provides multiple benefits, such as reduced tax.

SMSF
Adding a property to your Self Managed Super Fund can save you money on tax and boost your retirement savings. Any rental income earned on a property managed as part of your SMSF will be taxed at a rate of only 15% and capital gains at 10%.

Not sure which ownership structure would best suit your needs? Well, here are a few factors you should consider:

1. Complexity
The more complex an ownership structure, the more expensive it can be to establish or maintain, and the more difficult it can be to adjust the structure if your needs change. Complex ownership structures can be worth it if you are looking to invest in multiple properties or have a significant focus on property in your portfolio, but if you’re a first-time investor, it is often best to keep it simple.
2. Asset Protection
If you run into any sort of legal risk, regardless of whether your property is involved, you can run the risk of losing your investment. Making sure you have adequate asset protection is an important consideration when deciding on a suitable ownership structure.
3. Tax
Investment properties are a great way to save on tax and offset losses. Therefore, ensuring your chosen ownership structure is set up in such a way that best suits your circumstances should be one of the most critical aspects of your decision-making process.

If you’re considering investing, the most crucial piece of advice is to seek an expert’s opinion, such as an accountant or a lawyer. Investment can be complex, so it is best to be confident you are choosing a structure that ensures you will receive the maximum benefit from your property.

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Negative gearing- what is it and how could it help you?

Written by David Evans on April 2, 2014. Posted in News

Negative gearing essentially turns your property into a business, if it costs you money to hang onto that property throughout the course of the financial year, then that loss can become a deduction off your income.

I have provided the following as a rough example;

$400,000 investment villa, purchased in 2012, built in 2010, renting at $440 per week, $3,000 per year for rates and taxes, 1,200 per year for insurance, $420,000 loan with an interest rate at 5.29% 3 year fixed.

We will divide our expenses into two areas, physical costs such as interest, rates, repairs and insurance and virtual or non out of pocket expenses such as depreciation.

The property generates $22,800 in rent a year, the client receives around 90% of this after management fees have been deducted, leaving roughly $20,592.

The interest on the property is $22,218 per year, along with rates and insurances of $4,200 per year this takes the costs to $26,418 per annum in physical costs.

The result of the above is a loss for the year of $5,826, any loss will mean the property is negatively geared.

If we say the owner is making $70,000 per annum in income, they are currently paying around $14,297 in tax giving them a net income of $55,703. If we apply the above loss of $5,826 to the clients income, this takes them down to a taxable income of $64,174, reducing their tax paid to $12,404, resulting in having to pay $1,893 less in tax, reducing their out of pocket expenses on the investment property to $3,933 per year.

The loss of $3,933 per year represents just under 1% of the property’s value per year, so as long as the investment property grows at greater than 1% per year they are in front.

Now if we throw depreciation into the mix, we can further improve on the above figures. As the building was built after 1985, we can claim 2.5% of the building cost as depreciation until the building reaches 40 years of age. If the building cost $130,000 to build, you could claim $3,250 per year as depreciation on the building. Depreciation is a good loss in the sense that it has no physical cost attached to it.

So applying depreciation to the loss will take the $70,000 income down further to $60,924, resulting now in only $11,347 paid in tax, taking the out of pocket expenses down to just $2,876 for the year, equaling just .72% of the property’s value.

So applying the figures and gearing above we have taken a loss of $5,826 per year or $112.04 per week, to $2,876 per year or $55.31 per week.  Halving the holding costs and giving every chance to the property to be a better investment.

It should be noted the above is a simple example, you cannot factor in the issues you can potentially experience as a landlord and you should always consult with your accountant prior to any investment purchase or speculation.

The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered, advice sought and relevant research carried out. 

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