(Different ownership structures depend on your investing agenda. In this article, accounting expert Noel May of Noel May & Associates discusses the pros and cons of determining ownership of your property.)
Welcome back. In this part we said that we’d look at the pros and cons of you buying an investment property in your own name, especially when compared against using other ownership structures like a discretionary trust, a company or a superannuation fund. For simplicity, I plan to lump a joint-holding arrangement, like a partnership, in with ownership as an individual.
It is no surprise to say that people buy an investment property to ‘make money’. How you do that varies, however. Some look to make a profit from the monthly rental of the property, some want to renovate a property and make a profit on the increased value that they create. Others are happy to allow the property to naturally grow in value and make some money on the eventual sale of that property. Some investors are even willing to suffer some short term drains on their cashflow with a view to making a larger killing later on.
Certain of the different ownership structures work better for these different agendas.
At the same time, your personal circumstances also play a part in determining the most suitable ownership structure. Do you have a partner; are they working; do you want them to share in the project; do you have low-income adult children or parents; do you have some superannuation money that could earn a higher return? All of these factors also come into play.
Over the series of articles we will look at the pros and cons of ownership under different structures. When we examine each, there are 5 broad areas of comparison:
- Tax rate applicable
- Availability of an offset for losses
- Treatment of Capital gains
- Limited Liability
- Suitability for negatively/positively geared investments
Sole Owner — If you hold an investment property in your own name, 100% of the profits made from property rental are included in your personal tax return, adding onto your income from other sources like wages, interest, dividends etc. Your total taxable income is taxed at the following rates.
Partnership — The tax treatment for the partners of a partnership is basically identical to that for a sole owner; the partner’s share of profits is taxable in the partners’ private tax returns at their respective tax rates.
Availability of an offset for losses
Revenue Losses — Losses made from rental activities are generally deductible against your other income, effectively reducing your taxable income.
Partnership — A partner’s share of any revenue loss is deductible against that partner’s other income.
Quarantined — With trusts, companies and superannuation funds, any losses incurred are quarantined within the entity and cannot be distributed to you or your partner. The losses are available to be offset against future profits within that entity. Using one of those entities, it is conceivable that you could have income this year from other activities on which you will be taxed, while your investment vehicle could have a rental loss but you won’t be able to offset those losses against your other income.
Treatment of Capital Gains and Losses
Capital Gains — Profits that you make from the disposal of an investment are capital gains and if the asset was sold within 12 months of purchase, 100% of the gain is added to your personal income.
If you’ve held the property for more than 12 months then you will most likely be able to utilise the 50% discount on capital gains, whereby you only include 50% of the capital gain in your income tax return and it is taxed along with your other income. Not a bad deal.
Capital Losses — Losses made from the disposal of the property are capital losses and can only be offset against other capital gains, not wages and other income.
Partnership — Capital losses are split between the partners but can only be offset against capital gains that each partner may have.