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Buying an Investment Property in NSW? Which Tax Structure should you Own the property in?

When looking at purchasing an investment property in NSW, understanding the tax implications of various ownership structures is crucial. Whether you’re thinking of buying the property in your name, in a company, trust, or a self-managed super fund (SMSF), each structure has its unique benefits and drawbacks. In this article, we provide a brief overview of the most common tax structures used to purchase property. Please note the structures listed and the taxes outlined below are not extensive, and further legal and taxation advice should be sought before making any decision.

Individual:

This is the most common way to purchase an investment property. It is also the simplest, cheapest, and usually the easiest for a bank to finance.  Individuals can take advantage of the Capital Gains Tax (CGT) 50% discount (provided the property has been owned for at least 12 months). Buying in individual names is also very popular because of negative gearing benefits. Individual owners can offset rental property losses against their taxable income. The tax saving could be as high as 47% for negative gearing losses. In NSW, individuals can currently hold up to $1,075,000 of investment property (based on land value), without paying any land tax. The main downside of this ownership option is that it provides no legal protection for the owners, and no flexibility in regard to how any future capital gains can be distributed or shared amongst the owners.

Company:

Probably the least used ownership structure for an investment property is a Pty Ltd company structure. Companies pay a flat tax rate of 30% on any profits, which makes them attractive for high-income earners. Also, profits can be retained within the company and reinvested, deferring any personal tax liability for the shareholders. Companies in NSW also receive a land tax threshold of $1,075,000 (Similar to individuals). However, companies do not receive the 50% CGT discount! Further, companies have much higher annual compliance costs (compared to owning the property in individual names). Companies also cannot take advantage of any negative gearing. Usually, we would only recommend a company structure for 2 specific reasons:

  1. Property developments (I.e when your goal is to develop and sell for a profit, and you do not have plans to keep the property long term).
  2. The investment property you are purchasing is generating a very high yield and is positively geared, however long-term capital growth is expected to be very low. This might be common for properties purchased in very rural / remote areas of NSW.

Trust Ownership:

Trusts can be used to purchase investment properties too. It offers better asset protection against creditors (compared to owning property in individual names) and income can usually be distributed to beneficiaries in a tax-effective manner, when using discretionary trusts. Moreover, If the trust distributes a capital gain to Individual beneficiaries, then those beneficiaries can take advantage of the 50% CGT discount provided the trust owned the property for more than 12 months. The downsides: Similarly to companies, trusts cannot use negative gearing, and they are costly to set up and maintain. In NSW, discretionary trusts may face higher land tax rates, as they do not receive any land tax free threshold.

Self-Managed Super Fund (SMSF) Ownership – Note, please consult with your financial advisor to determine if an SMSF is right for you. The below summary is merely an outline of some basic taxation rules that apply to SMSF’s and is not financial advice.

Purchasing an investment property in an SMSF has seen increased popularity over the last few years. Rental income earned in SMSFs that are in “accumulation phase” is taxed at 15%, and capital gains at 10% if the property is held for more than 12 months. SMSF’s can borrow money to purchase an investment property provided it is done with a complying limited recourse borrowing arrangement (LRBA) – please seek legal, financial planning, and tax advice. SMSF’s in NSW also receive a land tax threshold of $1,075,000 (Similar to individuals and companies). However the downsides of SMSF’s are: strict and expensive regulatory requirements, large set up and ongoing costs and also SMSFs cannot take advantage of negative gearing.

Disclaimer: This article is for general informational purposes only and does not take into account your individual circumstances. It is not intended as professional advice, and you should seek specific advice tailored to your needs from a qualified tax professional before making any decisions. Liability limited by a scheme approved under professional standards legislation.

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