Copyright 2014 Lee Accountants Pty Ltd....Copyright © 2014 Lee & Lee Accountants Pty Ltd. 4 Choosing The Right Structure How to Structure Your Property Investments for Success

Copyright © 2014 Lee & Lee Accountants Pty Ltd. 1


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Table of Contents

Investment Property Structure for Success .................................. 4

Individual .................................................................................... 5

Partnership ................................................................................... 6

Company ..................................................................................... 8

Trust ........................................................................................... 10

Case Study The Lee family ........................................................ 12

8 Critical Reasons to Choose the Right Structure ..................... 14

What is the best property investment structure .......................... 15

Summary .................................................................................... 16


Choosing The Right Structure

How to Structure Your Property Investments for Success Each year, thousands of hopeful and passionate Property Investors and Developers are planning

investment purchases or developments in the hopes of building a successful future. But many of

them fail to see that starting a successful property investment structure requires more than the

seed of a great idea, and an opportunity.

Regardless whether you’re about to venture into developing for yourself, or whether you’ve

already achieved great success and your property investments are turning over between $1 and

$10 million dollars, this report is a must‐read – because it will help you choose your property

investment structure (or restructure) wisely, and minimise financial distress.

Before structuring your property investments for success you need to consider three main fac‐tors; asset protection, legal tax minimisation and retirement & estate planning. Depending on the structure you choose, your assets may be at risk.

Structure for Success

Choosing an appropriate property investment structure helps maximise your returns and mini‐

mise the legal and economic risk to your properties. The choice of structure can significantly

affect your taxes. So before starting a property or development investment plan or restructuring

an existing one, consider (carefully) which type of structure is best suited to your personal

circumstances.

Let’s take a moment to look at the basic structures for starting, buying or restructuring your

investment. There are 4 commonly used investment structures in Australia:

Individual;

Partnership;

Company;

Trust; or a

Combination of the above.

“The Queen”

“The King”


From our experience, we find most people structure their investments to:

Protect personal assets – particularly the family home‐quarantining the asset from other business or investment assets with a much higher level of risk;

Choose a tax effective structure – to minimise tax legally;

Plan for business succession – to pass it onto the next generation of family or managers; and

Plan for retirement – and maximise revenue while renting or making a capital gain on the sale of the investment property.

Your choice may be influenced by:

If you are investing in a life style asset such as a new family home or holiday house;

If you intend to make a profit from the investment such as Rent from a Rental Property;

If you intend to buy a rental will it be commercial, a block of units or a single dwelling;

If you wish to build, develop and then sell or hold the investment for a period of time;

How you intend to realise your investment eg sale, lease, or transfer;

Your overall holding period for the investment.

The Individual

This is the simplest form of buying into an investment property or commencing a property devel‐

opment. Sign the contract in your name and begin. As an individual investor you own all business

assets and you’re responsible for the liabilities of the investment. Liability is unlimited! This

means your personal assets, as well as the assets you (the owner) shares with another person are

at risk.

Your net rental income or calculated capital gain is added to your personal

tax return. Tax will be assessed on your taxable income and paid at individual

tax rates. Losses are common in the initial purchase year. You may offset

rental losses against other income but not capital losses on the sale of your

investment.


Lee & Lee Tip: Be aware of the cons of planning for short‐term tax benefits or

investing under your own name. Read this report and find out why. And remem‐

ber: there’s no substitute for professional advice. Speak to a highly qualified and

highly skilled accountant to structure your property and development invest‐

ment for financial freedom.

PROS AND CONS OF THE INDIVIDUAL INVESTOR PROS CONS

Simple and cheap to set up

Full control & ownership of the investment – owner retains all financial re‐

wards

Rental losses can be offset against your PAYG tax from another job

No asset protection – Unlimited personal responsibility for investment debts

and other liabilities

No income splitting (e.g. with wife)

Income taxed at own marginal tax rate (a disadvantage only if on a high tax

rate)

Borrowing capacity is limited by your individual income and ability to service

the debt

There is a 50% Capital Gain discount on assets held over 12 months

Things to consider

Ability to refinance to maximise tax deductions.

Negative Gearing and how it will benefit you.

Your future plans and commitments.

You can loose private assets such as your home, contents and vehicles if the investment

goes into debt.— No Asset Protection.

The Partnership

A partnership is an investment structure between you and one or several more partners. The

most common partnerships are those between husband and wife. You should know: a partner‐

ship is not a separate legal entity and a partner cannot be an employee of a partnership. There

are two types of ownership—Joint Tenants and Tenants in Common.


JOINT tenants—usually means equal shares. If anything happens to a partner

e.g. dies the asset automatically transfers to the other partners.

Tenants in COMMON—usually means that each partner’s interest in the

property is separate to that of the other partners.

We recommend you consult a lawyer to draw up a formal Partnership Agreement, to clarify the following:

The roles and authority of each partner;

The percentage of each partnership share;

How funds are contributed and by whom;

Limited liability;

How the partnership will be closed down and assets distributed; and

How disputes will be dealt with.

A partnership lodges its own, separate tax return. Once the Australian Tax Office (ATO) assesses

this, the partnership’s profits are divided among the partners as set out in the partnership agree‐

ment. Each partner then adds their share of the profit (or loss) to their personal income tax for

assessment by the ATO.

PROS AND CONS OF A PARTNERSHIP PROS CONS

Partnerships are not expensive to set up, and relatively simple to

establish and understand

Income will be split between partners

Partnership losses will be “distributed” to partners, to be offset

against other income

Partners are personally liable for all debts incurred by the invest‐

ment, both jointly and severally (i.e. each partner is bound by the

other partner’s actions)

The partners assets are not protected and may be at risk if the in‐

vestment or development fails

Net profits are divided amongst all partners and taxation is charged

at the personal rate just like the Individual Investor


The Company

A company is a ‘legal’ person/entity, separate from its shareholders (owners). A company is able

to carry on investing or as a business in its own right. The powers of a company are regulated by

the constitution and details how they can be used. While a company can be listed on the stock

exchange as a ‘public company’ to attract investors, the majority of companies are set up as a Pty

Ltd (small proprietary limited). All companies are registered with and regulated by the Australian

Securities and Investments Commission (ASIC).

A company is owned by shareholders and run by directors. Shareholders may also be directors

and employees, as is often the case in a small family business. An alternative structure is the ‘one

person company’, where you are the director and the only shareholder.

Generally the liability of companies is limited to the capital generated by issuing shares. Directors

and some employees are personally liable under the Corporations Act 2001 – if found to be

fraudulent, negligent or reckless. Because the liability of shareholders is limited, a company struc‐

ture is useful for a business with a high‐risk profile.

Where a director signs a personal guarantee of security for those who lend the company money,

the limitation of liability is compromised exposing the director to risk. We strongly recommend

you speak with a qualified accountant and lawyer if you’re looking to set up a company. Consider

your personal circumstances and how a company structure could benefit your business.

Things to consider

You must share the profits with the other partners.

You and your partners are responsible for the debts of the partnership, even if you do

not directly incur or cause the debt.

You can lose private assets such as your home, contents and vehicles to settle debts of

the partnership.

You are liable for personal income tax on any income you receive from the company.

Your company is legally required to pay superannuation contributions for any eligible

workers in its employment, including you. And it may be liable to pay work‐cover ob‐

ligations.


PROS AND CONS OF A COMPANY

PROS

CONS

A company is a separate legal entity

30% flat rate of tax

If the company’s investment activities fail, the personal

assets of the shareholders are protected (if they were

not required to give personal guarantees)

Shareholders (owners) are not responsible for company

debts unless they sign a personal guarantee

It is easy to admit or retire investment partners by sim‐

ply buying or selling shares, or alternatively by issuing

new shares

A company is more expensive to establish and maintain

Cost of compliance with ATO and ASIC regulations are

generally higher than other structures

50% discount on Capital Gains is not available for any

capital assets owned and disposed of by the company

(e.g. Goodwill)

Cannot distribute losses to individuals; loss is trapped in

the company and carried forward to offset future years

income (conditions apply)

Things to consider

A company is more expensive to establish and operate.

The tax reporting requirements for companies are far greater than for individual investors

and partnerships.

During event of sale, 50% CGT (Capital Gain Tax) discount is not available.

Losses incurred in the company cannot be distributed to individuals.

You as the Director, may be personally liable for the company’s debts in certain circum‐

stances.


The Trust

In broad terms a trust is a relationship between the trustee (legal owner) who holds title to all

assets or income on behalf of others (beneficiaries). The beneficiaries (beneficial owners) who

receive all the profits are taxed directly.

Trusts are legal entities. A trust holds property or income for the benefit of the beneficiaries. If

your property investment or development is set up as a trust (with you being the legal owner),

then you are a trustee holding property or income for the beneficiaries of that trust.

Trusts are great vehicles for increased asset protection, especially if the trustee is a company

offering the advantage of limited liability.

You can choose from a number of different trusts, including:

Unit trusts – share of entitlement to income and capital of the trust is deter‐mined by the number of units owned;

Fixed trusts ‐ share of entitlement to income and capital of the trust is deter‐mined by the portion owned e.g.10%, 20%, 80%; and

Discretionary trusts ‐ share of entitlement to income and capital of the trust is determined at the discretion of the trustee – providing flexibility tax planning opportunities and asset protection mechanism, and

Hybrid trusts – features a combination of the above

If your trust is discretionary (also known as a family trust), you (the trustee) can decide how prof‐its are distributed between beneficiaries. Many investment owners use a trust to maximise ‘tax efficiency.’

But before you jump the gun you should know about the limits: such as when you distribute prof‐its to children under 18 (e.g. higher tax rates). If the entire net income of a trust is distributed, then the discretionary trust is not liable for tax. However, the trust beneficiaries will have to pay personal income tax on their shares. If you don’t distribute the trust’s profits, the trust could be hit with very high tax rates.

A trust continues to exist in the event of a beneficiary dying.

We strongly recommend you speak with a qualified accountant and lawyer if you’re looking to set up a trust. Consider your personal circumstances and how a trust structure could benefit your property investment and or development.


PROS AND CONS OF A TRUST PROS CONS

Ability to protect your assets from attacks

Flexibility to distribute income and capital gains to family mem‐

bers and therefore pay less tax

Flexibility to pay certain otherwise “private” expenses from the

trust and claim them as a tax deduction

The trust allows you to OWN nothing and control everything –

asset protection

The 50% discount on Capital Gains (CG) is available to be passed

on to the beneficiaries

Concessions are available to reduce CG tax for small business es‐

pecially “Goodwill on sale”

Higher Costs to establish and maintain

Trusts are complex: not many people understand precisely how

they work

You won’t benefit from the losses incurred by a trust, other than

them being carried forward to a future year to offset against fu‐

ture profits. (However, you can transfer profits, from profit trusts

to loss trusts and use other trust solutions to get around this

Winding up or changing the trust deed has tax consequences

Things to consider

Like a company, a trust is more expensive to establish and operate.

You cannot distribute any losses to beneficiaries. Losses are carried forward to future

tax years in the trust.

It may be more expensive to complete the required tax and administrative paperwork

each year.

Profits distributed to children under 18 may be taxed at higher rates.

If you are required to make amendments to the trust deed, it could constitute a reset‐

tlement for CGT & Stamp Duty purposes.

ATO dislike Trusts, so they are forever being targeted.


Case Study ‐ the Lee Family Master Structure


Tax Savings Story


Lee & Lee Tip: Make sure you start your property investment with the right

structure. If you have to restructure down the track, you will incur additional

costs, such as income tax, stamp duty and legal fees. This can become expensive.

8 Critical Reasons to Choose the Right Property and/or

Development Structure

By now you have a fair idea about the type of property investment structures available to set up

or restructure to. But before we wrap up this short report we want to emphasise the 8 critical

reasons to choose the right investment structure.

1. Asset Protection – The single most important reason for incorporating an investment business

is to protect your personal assets. In the event of a lawsuit or judgment against your investments

or development, no one can seize your personal assets. The decision to incorporate your prop‐

erty investment depends on whether your business lends itself to potential liability and whether

you can personally afford the risk of that liability.

2. Minimisation & Flexibility – There are more tax options available to company and trust struc‐

tures than to individual investors or partnerships. Owners of unincorporated businesses, such as

an individual or partnership, pay income tax on all net profits of the investment at marginal rates.

3. Expenses – Individual Investors and partnerships are easy to set up and maintain, while com‐

panies and trusts cost more in time and money. As a general rule, the simpler the structure the

less it costs to set up.

4. Individual Needs – You should carefully consider your individual needs. What are you looking

to achieve financially? Do you want 100% ownership, management and control of the structure,

asset protection or tax‐effectiveness? Are you considering working with partners?

5. Land Tax Liability — Local and State government.

6. Borrowing Capabilities – What finance and serviceability is required for the acquisition of the

investment property or development.

7. Retirement and Family succession planning.

8. Income tax planning and tax efficiency of the structure. Consideration should be given to

access to tax losses or negative gearing and the availability of CGT discounts and other tax con‐

cessions.

It’s critical to your financial success to choose an investment structure that allows you the great‐

est flexibility for growth. Let’s face it: as an individual investor, it is easy to set up and expand.

However, if your investment grows exponentially a restructure will most likely be required and


What is the best Investment structure?

The two most common investment structures that achieve all the objectives, are:

1. “The King” ‐ A Discretionary Family Trust (assuming a company is the trustee) or;

that can be very expensive. It is therefore important to research all the necessary facts as soon as

possible so that you can set up the right investment structure in the beginning. If you anticipate

specific circumstantial changes to your life in the near future (such as getting married, having

children or admitting new partners), then the corporate structure may be a good fit as it adjusts

to those changes.

2. “The Queen” ‐ A Company (assuming the shares owned by a discretionary family trust)

What if not structured this way?

If an investment structure does not involve a trust (either as the direct trading entity, or as the

shareholder of a company that is trading). Your private wealth of the family will be at risk, the

investment may pay much more tax than it should, and the options in terms of investment

succession will be limited.


To Summarise

Consider how you want to structure your investment properties, if you prefer to legally minimise

tax and the risk against your personal assets. Consider all available structures including: as an in‐

dividual, partnership, company ,trust or self managed super fund.

By using a trust or company structure you:

“Own nothing and control everything.”

Protect your assets from possible attack under a lawsuit.

Pay less tax when the investment makes profits.

Minimise capital gains tax when you sell your development or

investment property.

Before choosing a structure to start a new investment property or development, consult with

your accountant, financial adviser or solicitor.

We can help you to understand how to structure your investment or development

property for success.

Call us today for an initial meeting on investment structure for FREE!

Web: www.leeandlee.com.au

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Email: [email protected]

Remember

“It’s not how much money you make, it’s how

much you keep that counts!”

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Copyright 2014 Lee Accountants Pty Ltd....Copyright © 2014 Lee & Lee Accountants Pty Ltd. 4 Choosing The Right Structure How to Structure Your Property Investments for Success