Picture this – you are about to pay off your mortgage, you and your partner are keen on buying an investment property to keep growing your wealth, and you’ve heard that you could buy a property in a Family Trust, a company, or even an SMSF.
How do you choose, how do you know what is the right thing to do, and how do you know you won’t regret this decision later?
In this article, I’m going to discuss a practical example of how I helped my clients, David and Jessica, decide what is best for them.
The facts:
- High-income-earning couple with a young family
- Keen to reduce their taxable income
- Want to buy an investment property to accelerate their wealth
Narrowing down the structures
Company – this didn’t make sense as the property wasn’t a business asset, and you don’t get the 50% Capital Gain Tax (CGT) discount for assets held in a company structure.
SMSF – this didn’t make sense as we would have had costly set-up and ongoing costs to run an SMSF and create a borrowing arrangement within the super fund. This also wouldn’t have changed their tax position, as the property would be held inside superannuation. There are also very complex rules regarding property inside SMSFs.
This left us with investigating the pros and cons of investing in a Family Trust versus personally.
Personal names:
Pros: Buying in your personal name makes negative gearing straightforward: if interest and expenses exceed rental income, those losses can generally be offset against your salary, reducing tax payable in the year of loss. This was a clear benefit for David and Jessica being on the highest marginal tax rate to accelerate wealth accumulation. Borrowing is often simpler, and lenders commonly assess serviceability against personal income.
Cons: Personal ownership exposes the property to personal creditors and may complicate estate transfers on death.
Family Trust
Pros: A family Trust can offer flexibility in distributing positive income to beneficiaries with lower marginal rates and can be useful for long-term estate planning and some asset protection strategies when used correctly.
Cons: Family Trusts “trap” tax losses. Losses generated inside a Trust are generally carried forward within the Trust and cannot be distributed to beneficiaries to offset their personal salary income – so a Trust holding a negatively geared property will not immediately reduce David and Jessica’s high taxable incomes. This made the Trust structure less attractive given their goal is short-term tax relief from negative gearing.
Decision: Purchase an investment property in their joint names
The deciding reasons
- The investment strategy: this property was going to be a short-term investment only, 7 – 10 years.
- Tax planning: Given that David and Jessica have young children, at best, the potential beneficiaries of the Trust were David, Jessica and a corporate beneficiary. As the property would be negatively geared, David and Jessica wanted the ability to reduce their personal taxable income. The tax advantages of splitting potential future gains were negligible when weighing up the ongoing costs of a Trust and ‘trapping’ the tax losses.
- Asset protection: David and Jessica didn’t need the same level of asset protection planning as a high-risk professional (e.g. business owners, Doctors). Often all you need is quality home, contents and income protection insurance
- Estate and tax planning: While Trusts are often promoted for estate succession, David and Jessica only wanted to hold the property for a few years and then sell. Therefore, the estate advantages were limited, and the tax downside of trapped losses outweighed any protection benefits.
- Ongoing costs: The set-up costs of a Family Trust are often around $2,000 and ongoing accounting fees could be upwards of $2,000-3,000 each year.
- Location of the property: Land tax is a state/territory tax and rules differ for individuals, companies and Trusts. Therefore, there can be significant differences in land tax costs between purchasing a property in your personal name compared to a Trust, depending on which State you are buying in.
Key takeaways
- If immediate tax relief from negative gearing is a priority, personal ownership can often be more effective.
- If long-term succession, income-splitting of positive returns, or genuine asset protection are primary goals, a well-designed family Trust may suit better – but expect more complexity!
- Check state land tax rules and lending implications before deciding.
- Get tailored advice: structure choice is highly fact-sensitive; what works for someone may not work for someone else. Quality strategic financial advice is crucial to help you make informed strategic decisions that align with your goals.
Bottom line: Quality financial advice doesn’t cost, it pays.
Structuring your wealth is not a box-ticking exercise, it’s a strategic decision that should match your tax position, time horizon and family goals. Making the wrong decision can slow, not accelerate your wealth creation.
If you’d like to learn more or have a conversation about your situation, please make a booking via this link.
