What’s the difference between a trust, a “look through” company and owning a property in your own name?
It’s important that you don’t pay more tax than you need to. But, if you own your properties in the wrong way, you will almost certainly overpay.
Arguably the most important part of working with a good property accountant is minimising the tax you pay.
You do this by discussing different ownership structures with your accountant.
Usually, most investors will choose one of the following structures:
- Hold property in your own name
- Set up a trust
- Use a “look through” company (LTC)
Each structure comes with its own tax pros and cons, and each will be the best structure for different people.
Disclaimer: you’re about to read a few examples of where investors can save on tax by choosing the right structure. This is to show you what’s possible for different people. Please don’t try and figure this out for yourself. You won’t realise how unique your situation is until you talk to a property accountant.
Let’s start with trusts.
A trust is a separate legal entity, which owns assets on behalf of beneficiaries (usually you).
These can be useful for higher-income earners. That’s because the top income tax rate is 39%, whereas the trust tax rate is 33%.
So if someone on the top tax rate owned a property with a $10,000 profit, they’d pay $3,900 if holding the property in their own name.
But, if they owned the property in a trust, they’d save $600 and only pay $3,300 in tax per year.
But the cost of the trust also needs to be factored in so that you don’t save $1000 in tax but end up paying $1500 in trust management, for example.
A trust also allows you to transfer the ownership of property and other assets out of your own name so they can be protected, while still maintaining control over them.
This can also be useful for business owners and directors who face higher risks of litigation, being sued, and so don’t want to own as many assets in their own name.
Let’s move now to Look Through Companies, which used to be LAQC’s.
A Look Through Company (LTC) is a very useful re-structuring tool, because it takes on the tax rates of its shareholders.
Let’s continue with the high-income earner above, where she has a tax rate of 39%. Let’s say that her partner is a stay-at-home dad who isn’t earning an income right now. So his tax rate is 10.5%.
In this case, the lower-income earner might own 99% of the shares in the “look through” company and 1% of the shares could be owned by the higher income earner.
So if there was a property that earned $10,000 worth of profit, $9,900 of the profit (99%) would be taxed at 10.5%; the other $100 of profit (1%) would be taxed at 39%.
That means the property would pay a total of $1,079.50. That’s $2,221.50 less tax paid than if the property was owned in a trust.
Let’s now move on to holding a property in your own name.
This means that profits and losses go out to you individually. But there is very little tax flexibility and unlimited liability.
However, it is the cheapest ownership structure to set up and administer, because you don’t have to set up a new entity or file annual returns for that trust or company.
So if the amount of tax you would have to pay is the same whether you own the property in your own name or use a trust, then it’s often cheaper to just own in your own name. That way you don’t have to pay $2,000+GST to set up the trust.
There are other options and considerations. For example, if you as the investor already have a trust set up, this is something the accountant will also discuss with you.
You won’t realise how individual your situation is until you talk to an accountant. So it is in your best interest to get advice so you don’t inadvertently set yourself up to pay more tax than you have to.
