Copyright © 2014 Lee & Lee Accountants Pty Ltd. 1
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 2
Legal Disclaimers
All contents copyright © 2014 by Lee & Lee Accountants and www.leeandleesmsf.com.au. All
rights reserved. No part of this document or accompanying files may be reproduced or transmit‐
ted in any form, electronic or otherwise, by any means without the prior written permission of
the publisher.
This ebook is presented to you for informational purposes only and is not a substitution for any
professional advice. The contents herein are based on the views and opinions of the author and
all associated contributors.
While every effort has been made by the author and all associated contributors to present accu‐
rate and up to date information within this document, it is apparent that technologies rapidly
change. Therefore, the author and all associated contributors reserve the right to update the
contents and information provided herein as these changes progress. The author and/or all asso‐
ciated contributors take no responsibility for any errors or omissions if such discrepancies exist
within this document.
The author and all other contributors accept no responsibility for any consequential actions
taken, whether monetary, legal, or otherwise, by any and all readers of the materials provided. It
is the reader’s sole responsibility to seek professional advice before taking any action on their
part.
Reader’s results will vary based on their skill level and individual perception of the contents
herein, and thus no guarantees, monetarily or otherwise, can be made accurately.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 3
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
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 4
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”
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 5
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.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 6
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.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 7
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
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 8
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.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 9
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.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 10
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.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 11
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.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 12
Case Study ‐ the Lee Family Master Structure
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 13
Tax Savings Story
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 14
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
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 15
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.
Copyright © 2014 Lee & Lee Accountants Pty Ltd. 16
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
LIKE US ON FACEBOOK facebook.com/leeleeaccountants
Visit Us: Hypercentre, Suite‐5 / 50‐56 Sanders Street, Upper Mt Gravatt, QLD 4122
Tel: 1300 225 553(1300 CALL LEE) Fax: 07 3349 8208
Email: [email protected]
Remember
“It’s not how much money you make, it’s how
much you keep that counts!”