What is the best property investment structure?

17 April 2023 by Ross Barnett in Property Accounting

What is the best property investment structure?

Should your rentals be in a company, Trust, LTC, Partnership, Sole Trader, or something else?

This is a really common question, and there is no best structure for everyone. Everyone has a different situation, and a variety of structures can work best. Here are some things to consider:

  • Often normal companies don't work for long-term property investment - The 28% tax rate can sound appealing, but this is only an interim tax rate with more tax due later. Also, this major issue - "Why I don't like Standard Companies"

  • Do you need Asset Protection? What do you need to protect your assets from? This is an item to consider carefully and some things to consider are Director Risk, Trustee Risk, personal guarantees, Business Risk and Health & Safety Risk. Trusts are used for Asset Protection, but they are also a pain with the added costs and hassles. Trusts can be great and very useful, but just make sure you really need one.
  • Costs to set up and administer - For example, a Trust is expensive to set up, with lots of extra costs associated and also ongoing costs often around $1,000 per year. Usually, set up through a lawyer it will cost over $5,000 by the time associated parts are done (such as a personal home into Trust). An LTC is quick, easy, and cheap to set up. The ongoing costs are also very low.
  • Flexibility long-term - There is no flexibility if you buy a property in a personal name or partnership. You can't easily rearrange where the profit/loss is going and can't easily gain asset protection if required. Normal companies and LTC's give more flexibility but need to be extremely careful with any share changes as these can cause a deemed sale and large tax consequences.
  • Are the profits going to the person on the lowest tax rate? For example, if one person is earning $200,000 and paying 39% tax, and the other has no income and will be paying 10.5% tax, we would obviously want the profit to go to the 10.5% taxpayer. Trusts, or LTC's owned by Trusts, can give huge flexibility with splitting or allocating income to minimise tax - This video gives a great example "Can a smart structure save you over $10,000 in tax"
  • Can rental losses offset rental profits? With ring-fencing in place from 01/04/2019 your need to ensure that any property losses can offset property profits with your entities. For example, a rental in your personal name making a loss, cannot offset a profit in a Trust.
  • Fewer Entities - The more entities you have, the more costs, admin and hassle. So ideally, try to have the least number of entities unless there is a good reason for other entities.
  • GST - we would generally separate any GST property or entity from non-GST. That way, if residential rentals are rented short-term, they aren't falling into the GST net (claim GST on purchase but have to pay GST on sale, or pay GST on market value to deregister - this is a major issue).
  • Capital Gains - As mentioned in the first item, important to make sure it is easy to get long-term capital gains out of the entity. And as mentioned, a normal/standard company is very awkward and can result in a lot of extra costs to wind up the company and get your gains out.
  • Cost and complexity to change - If you already have rental properties owned in an entity, we can look to change them to a new entity. This is called a restructure, and used to be very easy, but with all the new rules these are becoming more difficult. With lots of catches and often the benefit is less than the cost. If done badly they can trigger a taxable sale, loss of interest deductions, and a restarting 10-year bright line, so it is very important to get expert advice on restructures.

 

There is no flexibility if you buy a property in a personal name or partnership. You can't easily rearrange where the profit/loss is going and can't easily gain asset protection if required.

Hopefully, that has given you a few things to consider, and a lot of property investors have a Property Advisory Meeting with me to either set up their best structure for them, or to review their current structure and to make simple improvements.

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

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