The principles behind purchasing a property using a legal structure
Australian property tax and expatriate tax expert STEVE DOUGLAS explains why setting up a company to purchase property requires careful consideration
Q I’m thinking of buying a property in Australia. Should I set up a company to do this?A Using a legal structure to purchase property is a very personal decision and should be based on a number of issues. These include legal protection, succession planning, transferability – and of course, taxation. As a general rule it’s not ideal to set up a legal structure as the company will not benefit from the current 50 percent Tax Exemption on Capital Gains. If a legal structure is deemed necessary, a Unit Trust or Family Trust would be more appropriate.
The nature of the property also makes a difference. If it’s commercial rather than residential, a legal structure may be more suitable – especially when there are multiple owners involved. In this instance a record of a defined unit allocation can determine each individual’s ownership of the asset.
With residential property, it’s best to make an acquisition in your personal name because if you can keep the debt levels high on the property during the time rent is collected, it can be very tax effective – both during your time abroad and upon a return to Australia. Buying in your own name is also essential if you wish to take advantage of the Principal Residence Exemption on Capital Gains Tax rule. This can only apply if you live in the property at some point upon your return to Australia.
Setting up a legal structure may also incur the loss of any benefits in building up tax credits on excess holding costs. In such an instance, any tax losses can become trapped in the entity, prohibiting you from offsetting any personal salary income against these losses upon your return to Australia.
In all cases, the use of a structure should be carefully considered. If your only reason is to obtain an artificial tax benefit, which some schemes and Hybrid Trusts promote, you may find yourself in trouble with the authorities. The Australian Tax Office has the power to look through and void the entity for tax purposes.
The current system and legal incentives for purchases as an individual already promote the ability for you to enjoy a tax-free investment. So if tax avoidance is your sole motivation, using a legal entity could prove detrimental – you may just outsmart yourself!
Great Post. Excellent advice. Love the blog.
Use of a structure should be carefully considered and in my opinion too legal structure Is not beneficial. And even if it is necessary then as you instructed family trust is the best option.
I think you have shared nice principles to purchase any property.You have shared really the best post. I appreciate your effort.
Great useful and informative post . These principles are very important for who is looking for purchasing the property.