8 min read
Author: Marc Lemaire-Sicre
Chartered accountant, specialising in investment property structure and accounting.
Reviewed by: Andrew Nicol
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Property investors structure their properties in three main ways: in their own name, through a look-through company (LTC), or using a trust. Each option has its own advantages and is suited to different circumstances depending on factors like tax, liability, and long-term goals.
There is no one best structure that works for everyone.
That’s why, in this article, you’ll learn what these three structures are and who they’re right for.
But don’t read this article and think, “great, I don’t have to talk to an accountant.” This article is here to show you what’s possible for different investors.
That way, you’ll be more informed when talking to accountant or financial adviser.
The first option is the simplest – it’s just owning the property yourself ‘in your own name’. That means that you don’t use a trust or company.
This is the cheapest and simplest option. But if something goes wrong, you’re on the hook. You have unlimited liability. On top of that, there aren’t many options to minimise your tax.
The individual investor owns the property. You don’t own it in a trust or company. You just own it yourself.
There are no fees to set this up and no ongoing costs other than preparing and filing your income tax return.
But this also means that the profits and losses are on you. There is very little tax flexibility and unlimited legal liability.
So, if you get sued, the buck stops with you.
This is the approach I recommend the most. It works well for first-time property investors.
Later down the track, investors often look at whether they need a trust or a company. That usually happens when:
Depending on your circumstances, your total tax might be the same (or similar) as when you use a trust.
So, this cheaper option (owning in your name) can make sense.
It’s also a good option for people planning to live overseas. This helps to reduce the complexity in following different tax rules.
Next, you have companies. These aren’t often used by long-term property investors.
But I sometimes recommend an ordinary company if an investor only plans to own 1 property.
But I don't often recommend this option because most long-term investors want to own at least 2 properties. So, there are better structures to choose from.
Why’s that? One of the main reasons investors choose property is the tax-free capital gains.
But you can only take capital gains out of an ordinary company if you shut it down.
So, let’s say you own 2 properties in an ordinary company. Then, you want to sell one and get the capital gains. You either need to:
That’s why many investors choose a Look Through Company instead.
Cost: Around $875 + GST to set up a company [LTC]
The next option is a Look Through Company. This can be complex. But, it limits your personal liability and can help you minimise your tax.
A Look Through Company (LTC) is another type of entity – or way of owning property.
The owners of the LTC are the shareholders.
All profits (and losses) of the LTC are taxed at the shareholders' personal income tax rates.
So let’s say your marginal tax rate is 33%, and you own 60% of a company. Then, 60% of the profits are taxed at 33%.
LTCs are a good way to own more than 1 property.
This is because, unlike ordinary companies, you can take the capital gains out without having to wind the company up.
So, you can own a few properties in an LTC and still take out the capital gains easily.
The special tax rules that apply to LTCs are complex. This means compliance costs can be higher than those of some other structures.
I usually recommend an LTC for investors who:
You can set up the shares in the LTC to divide up the property ownership. For instance, two people buying the property might take 50% of the shares each.
The biggest selling point for an LTC is limiting liability. This is useful for some people but not for others.
This is because rental properties aren't typically seen as high-risk.
LTCs aren’t as popular as they once were. But there are still benefits to them.
Cost to set up: around $2,200 + GST
Your next option is a trust. These are usually helpful for business owners who are at risk of being sued. Trusts also have more ways to minimise the tax you pay.
A trust allows you to own your property (and earn money off it) but not in your own name. This helps to protect the property from potential personal liability.
A trust is not technically a separate entity from yourself. But it is treated that way for some purposes … including tax.
A trust is a legal relationship between the people who:
The legal owners are called Trustees.
Those who earn income from investment properties are called Beneficiaries.
Beneficiaries get taxed at personal tax rates.
Any other income is taxed at the trust tax rate. This was recently raised to 39%
But, trustees can choose which beneficiary gets the most income.
So, let’s say one beneficiary has a lower personal tax rate, so you might give them more money because they’ll pay less tax.
So, let’s say there are two people – Mike and Sarah. They’re a couple looking to buy an investment property. Mike earns a higher income than Sarah.
If the trust pays money to Mike, it’s taxed at 39%. If they distribute money to Sarah, it’s taxed at 10.5%.
So if the trust has $10,000 to distribute to this couple, they’ll pay:
So if Mike and Sarah are a couple, you’d distribute the money to Sarah. That way, you can keep more of your own money and pay less tax.
The ability to do this means a trust can allow better tax efficiency than other options on this list.
I generally recommend a trust for:
So, let’s say Mike and Sarah own 3 investment properties.
But Mike is also the director of his own business.
There are Health and Safety regulations that say Mike is personally liability for any breaches.
That means Mike could be fined hundreds of thousands of dollars if something goes wrong.
That could put the couple's investment properties at risk if Mike is fined.
But by putting their properties in a trust, Mike and Sarah could continue to own these properties even if the worst happens.
Transferring ownership to a trust is useful for business owners like Mike, who are more likely to face legal issues.
Mike could also transfer any other passive assets to the trust, including the family home.
Tax rules for property investors are complicated. And are changing all the time.
So what was a good idea 5 years ago might not work today.
It's a good idea to talk to an accountant to help you better understand those rules.
Generally speaking, you’ll change your structure over time.
You might start out owning properties in your own name. Then, some investors move to an LTC and eventually restructure into a trust.
Let’s come back to Mike and Sarah. At the start, they weren’t keen on spending the extra money setting up a Trust or a LTC. That was back when they bought their first investment property.
Like most investors, their properties were making a loss at the beginning. And there was very little tax difference, so they decided to save their money. They just owned the property in their own names.
However, after a few years of growing their portfolio, their priorities changed. Particularly when they started to make a profit. So they’ve moved to a trust.
When thinking about which way to own your properties – there are other things to consider. Each one comes with its pros and cons.
You won’t realise how individual your situation is until you talk to an accountant.
So, make sure to get advice before you make your final decision.
