The ownership structure you choose when buying your investment property will have significant implications on the amount of tax depreciation you can claim. Tyron Hyde, director of Washington Brown explains
I was recently asked by an investor: “Should I buy an investment property under my own name, my company name or my super to maximise depreciation?”
While the tax implications are a very important part of your property investment strategy I would never make it the number one reason in determining what entity I buy my property in.
There are many other reasons why people buy property in varying classes, such as for security reasons or to minimise land tax.
In answering the question I explained that depreciation of property reduces the taxable income in the entity that holds the property.
So the tax rate for that entity, when the rent is included in the equation, derives the depreciation benefit you gain.
1. Property in super fund name: Washington Brown
Depreciation report calculates depreciation Year 1 at $10,000.
Max tax benefit to you is $10,000 × 15% = $1,500
2. Property in personal / trust name: Washington Brown
Depreciation report calculates depreciation Year 1 at $10,000.
Max tax benefit to you is $10,000 × 45% = $4,500 (Max tax rate 45%) (If you’re on the highest marginal tax rate)
3. Property in personal / trust name: Washington Brown
Depreciation report calculates depreciation Year 1 at $10,000.
Min tax benefit to you is $10,000 × 0% = $0 (Max Tax Rate 0%)
4. Property in company name: Washington Brown
Depreciation report calculates depreciation Year 1 at $10,000.
Max tax benefit to you is $10,000 × 30% = $3,000 (Flat tax rate 30%)
Important points from the above:
a. As you can see from the above I have grouped the personal and trust entities together.
That’s because a person is normally a beneficiary of the trust and therefore the same tax scales apply to both entities.
b. If the only income you receive is the rent on a property and that rent keeps you in the minimum threshold – then the depreciation benefit is nil.
If the property is in a trust and is negatively geared then the depreciation will increase those losses. But losses in a trust cannot be distributed and therefore are quarantined in the trust until those losses can be offset by other revenue.
This is an important note to consider when buying property in a trust as the income received via rent cannot be added to your personal income.
c. The super fund has the lowest tax rate affecting your depreciation. But this is also a good thing, as all income is only taxed at the maximum rate of 15%.
Personally, I have purchased property in my own name, my super fund and in a trust all for varying reasons.
I always seek financial advice from my accountant or financial advisor before entering a contract. That way I know the entity that ends up holding the asset is the right one from the beginning!
