Just like property, investment portfolios need to have a good structure.
The structures we establish will depend on various factors:
- Personal circumstances
- Goals
- Risk capacity
Here are the different options when it comes to choosing your structure:
- Individual
The advantage with this structure is that you can offset your personal income tax and it is easier to get financing, less expensive to set up and manage, with much less paperwork. Your assets are however, vulnerable to claims and if your property becomes positively geared, you will lose your tax advantage.
- Company
When you have a Company structure, your asset is protected and your net rental income is potentially taxed at a lower rate. Companies are expensive to set up and maintain and you will be ineligible for the 50% CGT discount on any capital gain. Losses can only be claimed against future income and it can be more difficult to access capital, if you want to buy more properties.
- Partnership
A Partnership is fairly easy to set up and is a separate entity for taxation purposes and is required to distribute income to the partners. Distribution flexibility can be limited, as payments have to be made, according to the partnership agreement. There is no risk protection, as each partner is open to creditor claims and liable for the debts of the entire partnership.
- Trust
A Trust is a legal entity that provides management of assets on behalf of its beneficiaries. A Trust can provide asset protection and is flexible when it comes to determining payouts to beneficiaries. Trusts can be complex and costly and negative gearing losses cannot be offset against your income.
When deciding on the structure, make sure you consider if there is a real need for asset protection.
Also consider who will receive income and capital from the investments.
In addition, will you need easy access to capital and what structure will suit your tax situation?
There is also the issue of estate planning and all the costs associated with setting up the structure.
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