Buying a property in your name, trust or company name
A name is just a name, right? Not really.
Properties are some of the biggest investments Australians make in their lifetime, and so it makes sense to get it right from the beginning.
Depending on whether you’re registering in your name, a trust or the company’s name will provide you with different advantages and disadvantages especially when it comes to tax and ensuring your property is passed down to your children.
This blog will run you through the pros and cons of each, but keep in mind that this is just a guide and isn’t a form of financial or investment advice. Be sure to seek the help of a tax accountant or solicitor before making a decision.
Most properties, both investment and family homes, are purchased in personal names. The main reason for this is simplicity. Anybody above the age of 18 is permitted to purchase a property in their name.
When it comes to homes to live in, as opposed to investment properties, they’re generally easy to finance when compared to the other options. As long as you have 10% of the purchase price saved, 24 months of full-time employment, and a clean credit history, you can borrow up to 95% of the purchase price in the form of a mortgage. Obviously, this all depends on the lender you’re seeking funds from and the interest rates.
In addition to this, there is no capital gains tax associated with the property once eventually sold assuming it was the main residence for the owner along with no land tax payable.
Depending on the state and financial year, home buyers may also get access to First Home Owner Grants and stamp duty exemptions. If you’re also worried about the property being intergenerational, family homes are transferred to the surviving spouse followed by beneficiaries without death duties or stamp duty being payable.
When it comes to loans, investors typically have access to a lending ratio of up to 90% if purchased in their personal name. However, do keep in mind that this only applies to investors on a salary and for a small number of properties. Otherwise, the lending ratio drops to 80%.
As an investor, your goal is to typically create another income stream. With market fluctuations, this isn’t always easy or forecastable so you can offset the losses the negatively geared property against your personal income to decrease your personal tax.
The Issues and Solutions
The biggest issue associated with purchasing in a personal name is the availability of little asset protection. However, there are some ways to limit asset exposure.
The first is to, but your family home (owner occupied) in your partner’s name or buy jointly with a person. For the person taking the most exposure, take a 1/100th share in the family home.
Second, home and contents insurance is a must. Not only does it cover contents and any risks associated with storms and acts of god, but it’ll also cover the risks of injury if somebody were to injure themselves at your property.
Although cross-collateralisation may be appealing when securing a loan for an investment property, it can cause potential issues. Cross-collateralisation involves a lender, such as a bank, offering one loan with security over both your family home and investment property. This risks exposing your family home to loss on the investment property. Depending on your risk appetite, it may be worth taking two separate loans – one for each of your properties.
Companies, Trusts and Self Managed Super Funds (SMSFs)
If you’re the owner of a business, a sole trader or a builder, for example, you are typically exposed to litigation personally due to personal guarantees, absorbing business debts and the risk of partnerships dissolving.
Asset protection is the number one reason why property investors seek property investment structures like companies, trusts and SMSFs. Let’s look at each in detail, and we’ll explain why trusts are the favourite legal structure for property investors.
Companies and Asset Protection
Companies are separate legal entities to their founders and directors. This is because of the limited liability protection for its owners, hence ‘Proprietary Limited’ (Pty Ltd). Even though a company could be liquidated or go into administration, neither of these two events will expose the shareholders to personal liability.
Trusts and Asset Protection
When it comes to trusts, a trust is a legal relationship where the trustee administers the trust’s assets for the beneficiaries. When it comes to the most common trust, family trusts, the trustee would typically buy and finance the property in the trust’s name. In the event there is litigation relating to the property, the trustee company is involved and not the family members or beneficiaries.
This is primarily why trusts are the most preferred legal structure for property investors. In addition to shielding the family members, any claims for debt toward a family member cannot be claimed against the trust’s assets. The assets are shielded from creditors simply because none of the beneficiaries have ownership rights.
Similarly, with self-managed super funds, the member would have a retirement fund in their name that can only be accessed upon retirement. SMSFs also afford asset protection as the fund is unavailable to creditors if the members become bankrupt.
Trusts and Tax Effectiveness
When it comes to trusts, the profits can be split in various ways each year – it’s up to the trustee to decide. This means that the profits can be split to smooth the taxable income of the entire family. That is, a trustee would take advantage of a low-income family member and their lower tax bracket.
The downside to this is that trusts are best suited for positively geared properties. If there is a loss, there would need to be cash flow from other sources to offset. The reason for this is that although profits can be split, losses cannot and thus cannot be used to decrease an individual’s taxable income. The losses instead get carried forward.
SMSFs and Tax Effectiveness
When it comes to creating a tax shelter, SMSFs are king. The income tax rate is low (15%), capital gains tax rate of approximately 10%, and there’s zero tax when in retirement.
Planning Your Estate
With a trust, trust assets are passed according to the trust deed – typically to the next generation. In a family trust, for example, on death assets pass to the next appointor. The passing means that the assets do not need to be sold or transferred and also means that there are no death duties or taxes.
SMSFs are obviously different. On retirement, the SMSF must pay a pension to the member which means that not too long in, the trust property will need to be sold or distributed to the member once cash runs out. This means that when it comes to making the property inter-generational, SMSFs are of limited value.
So what should you do?
As explained earlier, we’re not providing you with actionable advice and recommend you seek the help of a professional before making any decision. To summarise what we’ve written family trusts find their strength in tax flexibility, preservation of wealth and asset protection. SMSFs excel at asset protection and create a tax shelter (especially the latter). Personal names really offer one thing and one thing only: simplicity.