Buy Under Company, Trust or Personal Name?

When purchasing residential property in Australia, deciding whether to buy under a company, trust, or personal name depends on factors like tax considerations, asset protection, and long-term goals. Below is a detailed breakdown comparing the pros and cons of buying residential property under each structure.

1.Buying Under Personal Name

Pros:

• Access to Main Residence CGT Exemption:

The main residence capital gains tax (CGT) exemption applies if the property is your primary residence. If the property is sold, there is no CGT liability, which can be a significant tax benefit for owner-occupiers.

• Simplicity:

Owning property in your personal name is the simplest option. There are fewer legal and administrative requirements compared to company or trust ownership. You can directly manage your property without needing a trustee or company director.

• Lower Tax on Capital Gains (for Individuals):

If you hold a property for more than 12 months, individuals are eligible for a 50% CGT discount on the capital gain when selling. This is a major benefit compared to companies and trusts, which don't receive the discount (except in certain circumstances).

• Direct Control and Flexibility:

As an individual owner, you have full control over the property, including decisions about management, sales, or modifications. There's no need for a trustee or corporate board approval.

• Lower Setup and Maintenance Costs:

There are no setup or ongoing maintenance costs for structuring ownership, as would be the case with companies or trusts.

Cons:

• Higher Tax on Rental Income:

Income from rental properties will be taxed at the individual’s marginal tax rate, which can be quite high (up to 47% for high earners). This can significantly reduce the financial benefits of owning a rental property, especially if it generates substantial income.

• Exposure to Personal Liability:

When owning property in your personal name, your personal assets could be at risk if legal issues arise or if you are sued (e.g., for property-related disputes or accidents on the property).

• Limited Asset Protection:

Personal ownership doesn’t offer significant protection against creditors. If you encounter financial difficulties or legal issues, creditors could potentially seize the property or other assets in your name.

• Inheritance Issues:

Direct ownership in your personal name can lead to complications when transferring the property to heirs, and it might trigger a capital gains tax event upon death, unless the property is transferred under certain conditions.

2.Buying Under a Company

Pros:

• Limited Liability:

A company offers limited liability, meaning the company is a separate legal entity. This protects personal assets from any debts or liabilities incurred by the company. If the property faces financial trouble or legal issues, the personal assets of shareholders are generally protected (though directors could be personally liable in certain circumstances).

• Tax Advantages (Corporate Tax Rate):

Companies are taxed at a flat corporate tax rate (typically 25-30%, depending on the company structure). If the company earns rental income, it is taxed at this lower rate, which may be more advantageous than personal income tax rates for high-income earners.

• Potential for Income Splitting (Through Dividends):

Companies can distribute income to shareholders in the form of dividends, potentially providing tax planning opportunities if the dividends are paid to shareholders in lower tax brackets.

• Capital Gains Tax (CGT):

While a company doesn't qualify for the 50% CGT discount available to individuals, capital gains are only taxed at the corporate rate rather than individual rates, potentially leading to tax savings if the company retains the gains rather than distributing them.

• Asset Protection:

As a separate legal entity, a company offers protection from personal liability, which can be important for protecting business or investment assets.

Cons:

• No Access to Main Residence CGT Exemption:

A company cannot claim the main residence exemption for CGT purposes. Therefore, if the property is sold and was used as a primary residence, any capital gains will be taxable, unlike personal ownership where this exemption is available.

• Higher Tax on Capital Gains:

If the property is sold, the company will be taxed on the capital gain at the corporate tax rate, which does not include the 50% CGT discount available to individuals. This could lead to a higher tax liability compared to personal ownership if the property has appreciated significantly.

• Limited Ability to Offset Losses:

Losses made by a company (e.g., rental losses) cannot be offset against personal income. This can be disadvantageous for individuals in the company who want to reduce their personal tax liability by using rental property losses to offset other income.

• More Complex and Expensive:

Establishing and maintaining a company structure is more complex and costly than owning property in a personal name. Ongoing costs include legal, accounting, and compliance fees. Additionally, companies are required to file annual reports, tax returns, and have directors and shareholders.

3. Buying Under a Trust (e.g., Discretionary Trust, Unit Trust)

Pros:

• Asset Protection:

Like a company, a trust offers asset protection since the property is held by the trust rather than by an individual. This protects the property from personal creditors, which could be beneficial in high-risk situations.

• Tax Flexibility (Income Splitting):

Trusts allow income to be distributed to beneficiaries in a way that minimizes tax. By distributing income to lower-taxed beneficiaries (e.g., family members), the overall tax burden can be reduced.

• Estate and Succession Planning:

Trusts provide excellent estate planning tools. Property held in a trust can be transferred between generations without triggering a CGT event, and the trust can continue holding the property after death. This makes it easier to manage succession.

• Capital Gains Tax (CGT):

Beneficiaries of a trust may be able to access the 50% CGT discount for individuals if the property is sold and held for over 12 months. This is a significant advantage over companies.

• Flexibility in Distribution:

Discretionary trusts provide flexibility in how income and capital gains are distributed to beneficiaries. The trustee has discretion to decide which beneficiaries get income or capital, allowing for tax-effective distribution.

Cons:

• No Main Residence CGT Exemption:

Like a company, a trust cannot claim the main residence exemption for CGT purposes. If the trust sells a property used as the primary residence, it will still be subject to CGT.

• High Tax on Retained Income:

If the trust retains income instead of distributing it, the income will be taxed at the highest marginal tax rate (up to 47%). This can lead to a higher tax liability than if the income were distributed to beneficiaries in lower tax brackets.

• Complexity and Administrative Costs:

Managing a trust is more complex than personal ownership. Trusts require ongoing administrative work, such as managing distributions, preparing annual financial statements, and filing tax returns. Legal and accounting fees can be significant.

• Limited Borrowing Capacity:

Lenders may require personal guarantees when borrowing through a trust, and trusts may face limitations on borrowing capacity compared to individual ownership.

Summary Comparison

Conclusion

• Buying under personal name is the simplest option, providing tax advantages if the property is a primary residence due to the CGT exemption. However, it lacks asset protection and exposes personal assets to risk.

• Buying under a company offers limited liability and tax efficiency in terms of lower corporate tax rates but lacks access to the main residence exemption and 50% CGT discount.

• Buying under a trust offers flexibility in income distribution, asset protection, and the CGT discount for individual beneficiaries but is more complex and costly to manage.

The choice between these options depends on your investment goals, tax situation, risk tolerance, and whether the property will be a primary residence. Consulting with a tax advisor or financial planner is crucial to determine the best option based on your specific circumstances.