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WHAT IS THE BEST STRUCTURE FOR COMMERCIAL PROPERTY INVESTMENT?

Commercial Property Investment

Investing in commercial property is an excellent strategy for generating wealth. However, to maximise your investment benefits, choosing the right business structure is crucial. Whether you’re just starting out or looking to grow your portfolio, the appropriate structure can profoundly impact your financial success. In this article, we will explore different structures and their pros and cons to help you make an informed decision.

Importance of Choosing the Right Structure

Selecting the appropriate structure for your property investment can significantly affect your financial outcomes. The right structure can provide tax benefits, protect your assets, and offer flexibility in management and succession planning. Conversely, a poorly chosen structure can lead to higher taxes, increased personal liability, and complications in managing the property.

Before starting your property investment journey, it is essential to consult with professionals. AWF Consulting’s accountants can help identify the best structure for your investments, ensuring you make the most out of your commercial property investments.

Popular Property Investment Structures

Many investors default to using a company structure for property investment, but this might not always be the most advantageous option. Here are six common structures to consider:

  • Personal Ownership
  • Joint Ownership with Another Person
  • Discretionary Family Trust
  • Unit Trust
  • Company
  • Self-Managed Super Fund (SMSF)
 

Investing in Your Personal Name

Advantages

Investing in your personal name is straightforward and easy to manage. It allows for the utilisation of negative gearing, which can offset your taxable income with any losses incurred from the investment property. This structure is often less costly to set up and maintain compared to other structures.

Disadvantages

The primary downside is personal liability for any debts incurred from the investment. Additionally, there are limited tax planning options available, as the income is taxed at your personal tax rate, which might be higher than the company tax rate.

Best For

This structure is best suited for first-time investors looking to benefit from negative gearing with minimal risks. It’s ideal for those who prefer simplicity and are starting with a small portfolio.

Joint Ownership with Another Individual

Advantages

Joint ownership allows you to share financial responsibility with another person, which can make managing and funding the investment easier. You can also benefit from negative gearing if the property operates at a loss.

Disadvantages

This structure can lead to potential disputes over management and ownership. Both parties are jointly liable for any debts, which can complicate matters if one party cannot fulfill their financial obligations.

Best For

This structure is suitable for first-time investors interested in negative gearing benefits and who prefer to share the financial load. It’s crucial for both parties to have a clear agreement to avoid disputes.

Key Considerations

  • Joint Tenants: Equal ownership with rights of survivorship, meaning the property passes to the co-owner upon death.
  • Tenants in Common: Individual ownership shares that transfer to the estate upon death, not the co-owner.
 

Investing Through a Discretionary Family Trust

A discretionary family trust allows a trustee to hold assets for the benefit of its beneficiaries, distributing them at their discretion. This structure offers flexibility in profit distribution and can provide significant tax advantages.

Advantages

One of the key benefits of a discretionary family trust is the tax-efficient distribution of profits. This allows income to be distributed to beneficiaries in lower tax brackets, reducing the overall tax liability. Additionally, it provides asset protection from personal financial or legal issues, as the trust legally owns the property, not the individual.

Disadvantages

However, setting up and managing a discretionary family trust can be complex and involves higher administrative costs. There are specific compliance and record-keeping requirements that must be adhered to, which can be burdensome for some investors.

Best For

This structure is ideal for high-income earners who have beneficiaries in lower tax brackets (such as adult children or retired parents) and for individuals needing robust asset protection. It’s also beneficial for those looking to distribute income strategically within their family.

Investing in a Unit Trust

A unit trust gives beneficiaries a fixed interest in the trust’s assets. This structure is often used when multiple unrelated individuals are jointly investing in property.

Advantages

The defined ownership interests in a unit trust provide clear delineation of each investor’s share. This clarity helps in managing the investment and ensures each party’s rights are protected. Like discretionary trusts, unit trusts offer some degree of asset protection.

Disadvantages

Fixed distributions can limit tax planning flexibility, as the income distribution is predetermined by the unit holdings. Additionally, unit trusts can be complex to set up and manage, requiring detailed trust deeds and ongoing compliance.

Best For

Unit trusts are best suited for unrelated individuals who are jointly investing in property. This structure ensures clear ownership interests and provides a level of asset protection, making it a good fit for partnerships and joint ventures.

Using a Company for Property Investment

Using a company structure for property investment can provide several advantages, particularly for high-income earners looking to manage their tax liabilities effectively.

Advantages

One of the main benefits is the potential for tax minimisation, as companies are taxed at a flat rate which may be lower than personal tax rates for high-income individuals. Additionally, companies offer limited liability protection, meaning personal assets are generally not at risk if the company incurs debts.

Disadvantages

However, using a company means losing the 50% Capital Gains Tax (CGT) discount available to individuals and trusts. The setup and compliance costs for a company are also higher compared to other structures, requiring more rigorous accounting and reporting.

Best For

This structure is suitable for high-income individuals seeking tax benefits and limited liability protection, who are not concerned with the CGT discount. It’s also ideal for those planning to reinvest profits back into the business rather than taking them out as personal income.

Investing through a Self-Managed Super Fund (SMSF)

Investing through an SMSF allows you to utilise your superannuation funds to purchase property, providing a vehicle for long-term investment growth aimed at retirement savings.

Advantages

SMSFs offer tax benefits within the superannuation framework, such as lower tax rates on investment income and capital gains. This can significantly enhance the growth of your retirement savings. Additionally, SMSFs allow for greater control over investment choices compared to traditional superannuation funds.

Disadvantages

The primary downside is the lack of immediate access to income, as funds within an SMSF are generally locked until retirement. SMSFs are also subject to strict regulations and compliance requirements, which can be complex and time-consuming to manage.

Best For

This structure is best suited for individuals focused on saving for retirement without needing immediate income from their investments. It’s ideal for those looking to grow their retirement savings through property investment over the long term.

Conclusion

Choosing the right structure for your property investment is vital, as it can greatly influence your financial outcomes. There is no universal solution; the optimal structure depends on your unique needs and goals. Consulting with an accountant is crucial in identifying the most suitable structure for your property investment, ensuring informed and strategic decisions for a successful investment journey.

For further guidance and support in selecting the best structure for your commercial property investments, contact AWF Consulting. Our experts can help you navigate the complexities of tax deductions and ensure that you maximise your business benefits. Reach out to us today to learn more about how we can assist you in managing your small business expenses effectively.

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