Traditionally the family home provided the financial security with the long term view to retirement or financial independence. Recent years have seen a move to investment properties by proactive individuals as the carriage to financial freedom. The Legal Elements have experienced conveyancing solicitors to help with all stages of property transactions whether you are buying or selling a home, unit, vacant block, strata title, commercial real estate or rural property.
Aside our normal services offered in a conveyance transaction we also can provide you further direction on:
- Tax considerations and asset protection including capital gains tax, and sales or purchases by companies, self managed superannuation funds, family and discretionary trusts and deceased estates
- Commercial property including leases
- Wills & Estate Planning
Additional Considerations To Make With Investment Property
Buying residential property as a long term investment is often a daunting experience for anyone. Before you head off and sign a purchase contract there are a few considerations to address. Different conveyancing processes are engaged across Australia however some basics remain the same. Specific advice should be obtained in relation to each State or Territory.
Taxation Advice – Individual or Entity
Financial advice must be sought in regards to your specific taxation position. Often purchasing an investment property in the name of individuals will allow for ‘negative gearing’ or tax deductions on personal income returns. The individual will generally be in a favorable position when it comes to any Capital Gain liability later when the property is on sold.
Where you are lending money on the purchase, your lender may have additional requirements where “minority” shareholdings are involved. This is where two or more people are borrowing the money and the shareholding of the property is as “Tenants in Common in unequal shares”. A minority shareholding of under 20% (depending on your lender requirements) may have your lender insisting on independent legal and financial advice being obtained by the minority shareholders.
Joint Tenants or Tenants in Common?
For more information on Joint Tenants or Tenants in common give us a ring.
Another way of holding property is by way of a discretionary or a fixed trust. The trust itself is another legal identity just like a company and as a result must submit a taxation assessment to the Tax Office. The trust must have a ‘Trustee’ either an individual or company. A typical structure is commonly known as a corporate trust, ideal for the individual or husband and wife. The ‘negative gearing’ effect for their personal taxation will be lost as this will now be that of the trust to deal with it in its own taxation position.
“Bare Trusts” are often used in transactions where a property is being held by a company on behalf of a superfund. The bare trust is a form of the “fixed trust” where fixed shareholdings amongst beneficiaries are determined in the trust deed unlike the “discretionary trust” or better known as a family trust, where discretionary payments can be made to various beneficiaries. Generally payments to beneficiaries will be subject to individual assessment with the Tax Office.
The structure combines the registration of a company and creation of a discretionary or fixed trust. Generally the individuals are the directors and shareholders of the company. The company is the trustee (manager) for the discretionary or the fixed trust, where the individuals are the beneficiaries or a Self Managed Super Fund (SMSF). This structure also limits any personal liability, protecting their assets, as the company (as Trustee) owns the property, takes the mortgage and is liable for loss and damage. Of course your Bank is likely to require your personal guarantee. With SMSF it is common practice for lenders to obtain personal guarantees from individuals as shareholders of the superfund and as directors of the company.
Many jurisdictions have a system of land tax where revenue is obtained by the State or Territory from ‘land rich’ individuals or entities. In Queensland for example, individuals may hold up to $600k of ‘unimproved land value’ (the same valuation used by local councils for rate calculation as determined by the Valuer-General’s Office) before a tax liability is created. A company or trust has a lower threshold of $350k before attracting the tax. The tax rate payable is often higher for companies and trusts than that of the individual.
Where a property is the residential home of an individual or a beneficiary of a trust holding the property, application for an exemption from land tax on the specific property in Queensland may be made. In obtaining advice on the above issues you will be in an informed position to identify the best entity to hold the property in with relation to your specific circumstances.