Choosing which structure to use can be daunting, but I make things a bit easier by being a firm believer in the KISS principle: ‘Keep Investment Structures Simple’.
There are many websites that will explain at length the pros and cons of each structure, so I won’t go into the details of each of them. Needless to say, the choice of structure has to be wise, and is entirely dependent on the investor’s personal circumstances and goals. A serious chat with an accountant is a fundamental first step.
SO WHAT STRUCTURES ARE AVAILABLE?
When purchasing a property, the most common structures are:
• Own name (individual or joint)
• Partnership
• Company
• Trust
- Family trust
(Discretionary trust)
- Unit trust
- Hybrid trust
- SMSF
When looking at the options, it is wise to keep in mind the consequences of each structure in terms of taxation, lending, asset protection, and costs. For example:
TAXATION: DOES THE STRUCTURE WORK FOR THE INVESTOR?
• A company does not benefit from the 50% capital gains discount available to other structures, and losses cannot be offset against other income.
• Unless a property is cash flow positive (before taxation effect), a discretionary trust is not suitable as losses cannot be distributed.
• If a trust structure is required, a unit trust is the best way to go as debt can be outside the trust so that there will always be a profit to distribute. A unit trust does not affect taxation.
• Hybrid trusts are the most flexible but also the most expensive to maintain.
BORROWING: BANKS' LIKES AND DISLIKES
Banks have no issue with most structures except:
• SMSF, where there are restrictions on borrowing, and some banks are not lending to SMSF altogether.
• Hybrid trusts. Only a handful of lenders will transact with hybrid trusts.
PROTECTION: HOW RISKY IS THE PURCHASER’S PROFILE?
• People who need protective structures are usually people in risky businesses. Most investors are employees or small business owners who are seldom at risk of being sued. Trusts can offer some protection but they are not foolproof. A family court, for instance, will see through trust structures, so a spouse cannot hide assets from the other spouse behind a trust or a company. • Most investors have mortgages associated with the properties, so unless there is substantial equity in the properties, a creditor is unlikely to sue. This is a ‘natural’ protection. • Obviously, in the case of an SMSF protection is key and is regulated accordingly. A bare trust (a trust within the SMSF) is mandatory to hold property in an SMSF so that banks can only access the bare trust if the borrower defaults.
IS THE COST OF THE STRUCTURE WORTH THE OUTCOME?
• Company and trust structures attract set-up costs and ongoing costs, and an investor needs to understand these and decide if it is worth it. In my mind, the investor should keep it simple unless there is a specific reason for a complicated structure. But at the end of the day, it really is a question of peace of mind.
THE KISS APPROACH
Although there is no flexibility with change of ownership, I find that, for most investors, buying a property in individual or joint names is the most appropriate structure. In the case of joint names, usually partners, an investor can nominate the ownership ratio, so that the highest earner benefits most from a tax point of view. Most structures have good points and bad points, but overall I think that if someone needs a trust for ‘protection’, then a unit trust ticks all the boxes from a taxation and lending point of view.
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Philippe Brach is CEO of Multifocus Properties and FinanceDisclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property
