Should I Purchase Property through a Company?
Our recent article covered the different options for structuring your investment property ownership and as we elaborated on there are positives and negatives with each that can make your choice a decision unique to your individual circumstances.
In this article we’re going to focus on company or corporate structures as a way of holding your investment property assets. Owning property through a company can have a number of advantages, and disadvantages which we will outline.
- Asset Protection. As a company operates as a separate legal entity it can help separate business or property risk from other assets the shareholders may have. This can mean that other assets held by separate but related entities aren’t caught in the crossfire should the company face problems. It can also present a problem if the company is a trading entity as it exposes these assets to other trading creditors or to legal action in the event of the company being sued which may concern a lender.
- It may affect your terms and interest rate. Lenders will be reluctant to see their risk increased by the use of a legal structure and may seek additional personal guarantees around their loans. At the very least this may impact on the interest rate or terms the lender is prepared to offer if their risk is intensified.
- Succession Planning. Is the property a long term investment? Have you thought about how you want to see it passed on? Property controlled under a company structure will not necessarily be dealt with in your will, although your shareholding will be. You should consider what happens to your shareholding in the event of your death. Are agreements in place to allow other shareholders the rights to acquire deceased shareholder’s interests? This may not be your intention for the property concerned and should be a factor in your succession planning.
- Land Tax. Almost all states in territories in Australia charge land tax on the unimproved value of property that is owned. The rates and thresholds vary from state to state. Although company owned properties are generally assessed the same as other ownership structures, companies can provide another entity for the purposes of spreading ownership of multiple properties, which can help reduce the impact of land tax thresholds and reduce land tax liabilities. This should be discussed in detail with a solicitor.
- Income tax and Capital Gains tax. The use of a company structure can impact the rate of tax you pay on income and capital gains you make. In the case of income tax, rates will vary depending on what structure is used and you will need to plan how income is to be allocated. Also the famous “negative gearing” will most likely not come into play. Likewise capital gains on the sale of assets owned by a company may not attract the 50% capital gain discount that occurs if an asset is held for longer than a year. Your income tax and capital gains tax ramifications should be discussed with an accountant prior to purchase.
How your company is structured may also be dependent on the involvement of other investors and may not be a decision you can make purely to your own advantage. It’s important to get advice before you consider a company structure for its impact on both yourself and other interested parties. Talk to our staff today as a starting point for exploring the option of a company structure.