There are different ways investors can structure their investment property for tax purposes. Some of the structure options include:
Individual or partnerships
Investing as part of a partnership is usually treated for tax purposes as a collection of individuals.
One of the advantages of owning property as an individual, particularly if the investment is negatively geared, is that any tax losses can be applied at the individual’s level against all of the individual’s other forms of assessable income, such as salary, wages and revenues from other business activities. Alternatively, the losses can be carried forward and applied against income from future years.
However, once the property starts to generating positive returns, income tax will be payable by the individual at their applicable marginal tax rate. Investing as an individual also does not provide investors with any form of asset protection from creditors or in the event of family break-ups.
One of the major advantages of using a discretionary trust to hold property is that the owner can decide who will benefit from the trust’s income.
For those with an investment that is positively geared, this means you can distribute the trust’s income in a tax-effective way, which is typically to the beneficiaries with the lowest marginal tax rates. Any capital gains acquired by the trust can also flow on to beneficiaries who have capital losses.
Asset protection advantages also exist when holding assets through a discretionary trust since beneficiaries are not the legal owners of the property. This means creditors cannot easily access the asset if a particular beneficiary encounters financial problems.
Many people use a company to hold their investment because it provides limited liability to shareholders. In addition to this, using a company structure also prevents the company’s creditors from accessing the shareholder’s assets.
When an investment becomes positively geared in a company structure, the company will pay tax at the corporate rate of 30 per cent. Shareholders can then claim franking credits on the dividends that the company pays out of taxed profits.
A negative of using a corporate structure is that it can sometimes be difficult to make use of losses that may occur as a result of an owner’s investments. This will be the case if the company’s ownership or nature of its business has changed.