What ownership structures should you use?

Here is a list of some of the ownership structures you could use in your investing:

Individual Names
Joint Names
Discretionary Trust
Self-Managed Super Fund (SMSF)
Investment Bonds
Hybrid Discretionary Trust (HDT)
Property Investor Trust (PIT)
Unit Trust
Land Tax Unit Trust
Bare Trust

Accountants and lawyers love these, and the bigger your portfolio the more complicated ownership structuring can potentially become.

We prefer to keep things simple, but effective nonetheless.

Our approach is to have your principal place of residence (PPOR) either in your own name, your partner’s name or in joint names with your partner.

There is however a case for owning your PPOR in a discretionary trust if you and your partner are both in high litigation-risk professions, and effectively renting from the trust and claiming the extra tax deductions – but, forgoing the capital gains tax (CGT) exemption in the process.

Residential investment properties should generally be held in the name of the highest income earner, but if both partners are in the highest tax bracket, they could be held in joint names as this would give both people the negative gearing tax benefits and minimise CGT later on.

If your residential investment properties are likely to be positively geared after all costs (more likely if you have put in a large cash deposit, you don’t continue to borrow against any future increases in property values, or you have high cash flows to quickly pay down debt), then you could consider using a discretionary trust instead.

If you wanted to transfer residential property to a SMSF later on, you could purchase the property using a unit trust or land tax unit trust; these allow negative gearing in a trust structure, land tax savings in some states, and may avoid stamp duty as well as facilitate CGT-reducing strategies on transfer to a SMSF.

However, it may be harder to get banks to lend to unit trusts in some situations.

Sometimes purchasing residential property in trust structures (unit trusts or land tax units trusts as mentioned above, or discretionary trusts) may also be done mainly for land tax savings for those who have multiple properties exceeding their personal land tax thresholds, and only in states where trusts have a land tax threshold.

Residential investment properties could also be purchased inside a SMSF – we discuss this in more detail in this article, Transferring $2M Into Your SMSF.

Commercial properties should generally be held in discretionary trusts (outside super), particularly if they are positively geared (or likely to become so).

Commercial properties could also be held inside a SMSF if enough funds are available for this.

It’s also worth noting that if commercial properties that are also your own business premises are held inside a SMSF they won’t be entitled to the small business concessions for any capital gains on sale, though CGT may be zero when the SMSF is eventually in pension mode anyway.

Shares should preferably be held inside super.

Small shareholdings outside super could be held in individual names (preferably in the lower income partners’ name), but if larger or with a view to becoming much larger, they should be held in a discretionary trust.

The same applies to cash, term deposits and bonds held outside super – though cash may be better held in home or investment property loan offset accounts if you have them.

As mentioned, large shareholdings outside super should be held in a discretionary trust but may also benefit from having a company as a beneficiary of the discretionary trust, where the income tax paid by the company is limited to the company tax rate of 30%.

This is particularly so if the distributed income of the trust is likely to be taxed at the highest marginal tax rate after all deductions and income splitting to family member beneficiaries.

Having a discretionary trust as a shareholder of the company can further enhance taxation planning by allowing franked dividends to be paid in later years to lower tax rate beneficiaries of the discretionary trust when they become available.

Further investments in the name of the company maybe worthwhile if the investments are mainly used to generate income and without plans to realise large capital gains, as the company structure does not get the benefit of the 50% CGT discount.

The above also applies to large holdings of cash, term deposits and bonds outside super – but again, with cash better held in property loan offset accounts if you have them.

The use of a company in the above way can also replicate much of what can be achieved through using an investment bond structure.

An investment bond is basically a company that invests in various asset classes like shares, property and bonds and pays tax at the 30% company tax rate, but if held for 10 or more years can be sold CGT-free – subject to you not making any withdrawals before this period and adhering to certain rules regarding annual contributions.

Although they can be useful in a number of specific circumstances, we prefer to use our own company structure to invest directly ourselves rather than using a fund manager (and paying their management fees) to invest via an investment bond.

And along with a discretionary trust as a shareholder of the company we can still potentially achieve lower or tax-free returns but with greater control and flexibility.

Other more complicated structures like HDTs and PITs are not recommended as they have very marginal benefits, higher costs, and fewer banks willing to lend to these structures.

Another point about trusts is that we generally prefer to use company trustees rather than individual trustees for greater long-term flexibility.

As you can see, ownership structuring can be a complex area and the types and combinations of structures used can vary greatly depending on the individual circumstances.

Other examples of this complexity include tenants-in-common structures, separate discretionary trusts per property, units trusts which owns units in discretionary trusts, and the use of bare trusts for SMSF property loans.

Not putting the right structures in place at the beginning can result in more costs for you later on, and put yourself at more risk.

The structure you use can impact on your overall tax position as well as the strength of your asset protection.

With respect to structuring, we strongly suggest you seek accounting and legal advice for your particular situation (and ideally get opinions from two or three different firms), particularly if you are looking to invest large sums of money now or in the future.

We have not discussed ownership structures for businesses here, which may include operating as a sole trader, company, trust, partnership or associateship, as this requires a more in depth discussion with your accountant or lawyer depending on your specific circumstances.

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