How to: Structure property investment as a company
If you’re researching ways to structure your property investment, have you considered using a company to hold your investment?
There area few different ways to structure your property investment; as a sole trader, as part of a partnership or through a discretionary trust. The other option is to use a corporate structure.
Read more: Property investment, trusts & tax structure
What are the advantages?
The most common reason why people use a company to hold their investment is that it provides limited liability to the shareholders. In other words, the extent to which shareholders are liable for the debts of the company is limited to the amount they’ve invested as share capital.
There’s also the advantage that the company’s creditors can’t access the assets of the shareholders.
Finally, there’s the benefit that once the investment becomes positively geared, the company will pay tax at the corporate rate of 30%. This is significantly lower than the top marginal rate for either individuals or trusts, which currently sits at 49%, including the Medicare levy and the debt levy. The shareholders can then claim franking credits on any dividends that the company subsequently pays out of taxed profits.
Companies provide limited liability to shareholders.
What are the disadvantages?
On the downside, a corporate structure means it can be tricky to make use of any losses that might occur as a result of your investments. This is particularly the case if the company’s ownership has changed or the nature of its business has changed.
Crucially, companies can’t access the 50% capital gains tax discount offered to individuals. This can lead to a bigger tax bill for the company if it sells its properties, since the gross gain will be taxed at the full corporate rate of 30%.
Read more: Property investment, tax structure & you
If you plan to use a company to hold investments, be careful if the company intends to loan money to shareholders or their associates. Unless the loan is very carefully structured, the complex rules in Division 7A of the 1936 Tax Act means that the loan can be treated as unfranked dividends, which can land the recipient with a very hefty tax bill.
A corporate structure means it can be tricky to make use of any losses.
The information in this article is for general interest and is not intended as advice. For advice and planning, consult an experienced tax professional.