When purchasing an investment property, the choice of ownership structure is important to ensure you minimise the effects of taxation.
Available structures include Self Managed Superannuation Funds (SMSFs), family or unit trusts and companies, as well as holding the property individually or in joint names.
When a rental property is purchased in your own name you can take advantage of negative gearing which effectively lowers your taxable income and reduces tax. If the property is held for longer than 12 months, individuals are eligible for the 50% general discount on capital gains, effectively halving the amount of capital gain you will pay tax on.
Holding a rental property jointly with your spouse has the same advantages and disadvantages as owning the property individually, however any assessable income and deductions and therefore any tax benefits or tax payable is shared in the same proportions as the ownership of the property.
SMSFs are useful for holding investments as they have a maximum tax rate of 15% on income and 10% tax on capital gains for assets held for more than 12 months. The money available to invest is limited to the balance of the fund although borrowing money may be a viable option. Investors should be aware that once contributions are made to the fund, the money cannot be accessed until the conditions of release have been met (normally on retirement). SMSFs which are funding pensions pay no tax at all on investments or capital gains.
When a rental property is held by a trust the net income can be streamed to the beneficiaries in a tax effective manner. Losses from a negatively geared property though are trapped in the trust and can only be used to reduce future trust profits. These losses may not be available to the individual beneficiaries unless they have other income they can pass on to the trust. The ability to claim the 50% general discount on capital gains will be determined by the type of beneficiary or trustee as trusts are not taxed directly.
If a rental property is owned by a company, tax is payable at a rate of 30%. However any losses on the property, as a result of negative gearing, are trapped in the company and used to reduce future profits. Companies are not entitled to the 50% general discount on capital gains, and therefore pay tax on the full capital gain at 30% in the year it is sold.
Generally the purchase of one residential rental property does not constitute carrying on an enterprise and therefore GST registration and reporting is not required. There is no GST applicable to rent on residential properties. GST may apply to commercial rental properties if the rental income is above $75,000 or the owner is otherwise registered for GST. GST on property is very detailed and specific to each individual case.
We would encourage anyone considering the purchase of an investment property to contact their investment advisor or accountant for advice which is specific to their needs and circumstances. The cost of getting the purchase structure wrong can be massive.