You're considering investing in Australian residential property – a smart move in today's economy. But, have you thought about the best way to own your investment? Understanding the different ownership structures and their implications, including tax considerations, is crucial for your success.

Let's dive in and explore some of the common ownership structures that both Australian residents and expats will consider.

1. Sole Ownership

Sole ownership is the simplest form of property ownership. It means you alone own the property and are solely responsible for it.

Pros:

• Control: You have complete decision-making power.
• Simplicity: Less complexity in management and taxes.
• Tax Benefits: You may be eligible for capital gains tax discounts and negative gearing benefits.
  • These tax benefits can often be realised at the highest tax rate, given the tax framework in Australia.
• Cost Minimisation: As there are no complex structures of reporting obligations, this makes the running costs of the ownership structure cheaper.

Cons:

• Risk: All financial risk is yours.
• Resource Limitation: Limited to your own capital and borrowing capacity.
• Estate Planning: Sole ownership can complicate succession planning.
• Tax Consideration: As a sole owner, your property income will be taxed at your personal income tax rate. For the 2023–24 tax year in Australia, this ranges from 19% to 45%, excluding the 2% Medicare levy, depending on your income bracket​​.
  • For Australian expats, a positively geared property will be taxed at 32.5% on the first $90,000, and then scale up from this level.

2. Joint Ownership

Joint ownership involves owning property with others, either as joint tenants or tenants in common. It's important to understand the difference, particularly with regard to your estate planning.

Pros:

• Shared Financial Responsibility: Costs and profits are shared.
• Borrowing Power: Joint owners can often borrow more together.
• Shared Decision Making: Responsibilities are divided.

Cons:

• Potential Conflicts: Differences in opinions can arise.
• Complex Sale Process: Selling or changing ownership can be tricky.
• Unequal Returns: Investment returns can be unevenly distributed.
• Tax Consideration: Each owner is taxed on their share of the property income according to their personal tax rates.

3. Trust Ownership

A trust is a legal entity where a trustee holds property for the benefit of the beneficiaries.

Pros:

• Asset Protection: Trusts offer a layer of protection against personal financial risks.
• Tax Flexibility: Efficient distribution of income to lower-tax-rate beneficiaries.
• Estate Planning: Simplifies the transfer of assets.

Cons:

• Complex Setup and Management: Involves ongoing compliance and administrative costs.
• Strict Legal Requirements: Must adhere to trust laws and regulations.
• Beneficiary Control: Beneficiaries have limited control over the trust assets.
• Tax Consideration: Trust income retained within the trust is taxed at a high rate (45% plus Medicare levy). However, income distributed to beneficiaries is taxed at their individual tax rates. Trusts can be an effective way to manage tax but require careful planning and advice​​.
• Main Residence: If you plan to move into the property, it’s unlikely the trust will be able to receive the benefit of the Main Residence Exemption.

4. Company Ownership

A company can be set up to own and manage property, with shareholders as the owners.

Pros:

• Limited Liability: Shareholders’ personal assets are generally protected.
• Tax Planning: Potential for tax-efficient structuring.
• Capital Raising: Easier to raise funds through selling shares. This is unlikely to be relevant for most individuals, but the allocation of additional shares may be of value to some families.

Cons:

• Regulatory Compliance: Higher level of regulation and reporting.
• Complex Transfer: Transferring ownership can be complex.
• Double Taxation: Profits can be taxed at both company and shareholder levels.
• Tax Consideration: Companies are taxed at a fixed corporate tax rate on their profits. This rate can differ based on the company's turnover and type. It's vital to consult a tax adviser for the latest rates and how they apply to your situation.

5. Self-Managed Super Fund (SMSF)

SMSFs can invest in property under certain conditions, offering a different avenue for property investment. It's important to understand the challenges for Australian expats when it comes to SMSFs also.

Pros:

• Tax Efficiency: Attractive tax rates, especially in pension phase.
• Portfolio Diversification: Adds property to your retirement portfolio.
• Long-term Growth: Potential for significant capital growth.

Cons:

• Regulatory Compliance: Strict rules and regulations.
• Limited Liquidity: Property can be less liquid than other investments.
• Usage Restrictions: Cannot use SMSF property for personal use.
• Interest Rates: The minimum interest rates are tightly controlled, and are often significantly higher than for a non-superannuation investment.
• Tax Consideration: SMSFs are taxed at concessional rates on rental income and capital gains, making them an attractive option for long-term property investment. However, the rules governing SMSFs and property investment are complex and require thorough understanding and advice.

Which is Right for You?

Before taking the plunge, it's crucial to seek professional advice. Tax laws and property regulations can be complex, and they vary depending on your individual circumstances and the structure you choose. A financial adviser or a tax professional can provide personalised advice based on your specific situation.

Additionally, don't overlook the importance of reviewing your lending options. A mortgage broker can help you navigate the financing landscape, ensuring that you find a loan that complements your investment strategy and ownership structure.

Investing in property is a significant decision. Equip yourself with the best advice and explore all your options to make a choice that will serve you well into the future.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.