(In this article about determining ownership of your property, accounting expert Noel May of Noel May & Associates looks into the remaining two areas of comparison in determining the pros and cons of ownership—and another thing to consider, which is a breakup.)
Limited Liability
There is a long-standing ‘Rule of Thumb’ that says that you should separate your assets from your trading. You work hard and long to amass some personal wealth within your investment portfolio. At the same time many businesspeople face risk every day; perhaps your business is only marginally profitable or you may be performing a role where you might get sued. Trading businesses can fail and the last thing that you want is to lose that hard-earned nest egg though some poor trading decision, which on occasions may not even be your doing.
For that reason many investors are looking to create a separation between their wealth-investments and their business. Should the business fail, their wealth investments would remain
intact.
Sole ownership or partnership unfortunately does not offer this protection. If you go broke in your business life, all of your assets are exposed and those suing have a right to force you to sell your investments if you can’t settle their debts.
Other structures like a family trust, company or superannuation fund offer this limited liability, where the entity’s assets are separate from your personal assets.
Suitability for negatively/positively geared investments
Sole ownership is suited to negatively geared investments because rental losses can be offset against other income to lower your overall tax bill.
Profits from positively geared investments will be added on top of your other income and taxed at you marginal tax rate (ie: the rate that the next $1 of income is taxed at). The eventual Capital Gain will also be taxed at your top marginal tax rate.
If you have other family members who are in a lower tax bracket that you, then you may want to consider the advantages of adopting an ownership structure that allows ‘Income Splitting’.
Imagine a person earns $80,000 in a year while that person’s partner has been recently retrenched and may only earn $10,000 during that year.
It would be a pity if 100% of the positively geared profit was taxed all at 39.5% in the first person’s hands when under a 50:50 partnership structure 50% of the profit would be taxed at 39.5% with the other 50% at 0.00%.
Even better still, in a discretionary trust structure 100% of the property profit might be distributed to the non-working spouse and may not incur any tax at all. In the following year when both parties are working again, the profit distribution could revert to 50:50. With a trust structure, this is possible, but with an individual or partnership ownership you are restricted to the initial ratios set.
Other considerations – A breakup
Life partnerships may fall apart. What a different world it would be if all partnerships and marriages lasted forever. The reality, however, is that they don’t. Relationships can deteriorate slowly over the passage of time, or quickly through problems with gambling, drugs, infidelity, mental breakdown or even death.
So before an investor decides to acquire a property in partnership with another, they need to take off the rose-coloured glasses for a moment and have a hard look at what might happen should your partnership fail. Maybe you’d be better off to have the investment in your own hands, or a trust.