Hello everyone. My name's Jose Delgado. I'm a corporate commercial tax attorney, for my sins.
What we're tackling today is we're often approached by investors who are seeking to establish a property portfolio and they're looking to understand what is the optimum, or the ideal structure to acquire or commence on their property portfolio in. Again we've got - do nothing and just buy everything into your name? Do I put it into a closed corporation? Do I put it into a Pty Ltd? Or is a trust a potential solution for me?
Primary residence, Close Corporation or Pty Ltd.?
As a property investor, this is not your primary residence. The primary residence exclusion or exemption is not a factor to consider here. What one needs to consider is your exposure because you're going to be acquiring property, you're going to be gearing it through borrowing funds from the bank. You also have tenant risk, you have potentially a risk when you sell the property. So one needs to consider the risk aspect very, very carefully. The other option is a close cooperation or Pty Ltd. Very often, a better tax position than just buying into your own name, and alternatively, you have the trust. We're going to do a little comparison between the different options available to you, and I'm going to group close corporations and companies together because effectively it's the same thing.
As we said earlier, buy into your own name, transfer duty is the same across all different entities. That's not a consideration at all, so you can take it off the table. Do you buy into your own name? Cease your Pty from a risk, or a trust from a risk perspective, definitely not in your name. You could have your rental property portfolio costing you your home. Your rental portfolio could cost you your business or your marriage, or vice versa. Your marriage could cost you your portfolio or your business could collapse and you lose all your investment properties. And then of course you have your ultimate demise which eventually is going to result in a portfolio not continuing to the next generation, which I think is often a very important aspect of why one would establish or set-up a property portfolio. Having the property portfolio in your own name, no asset protection, you're going to pay too much tax if you have a sizeable portfolio, because you're going to be earning a lot of rental income which will push you into the top tax bracket at 41% - not ideal. On your demise, you're going to be paying capital gains tax at the rate of 13.6%. You will have executor’s fees at 3.5% plus VAT, if the executor is a vendor. And then you also have estate duty on your portfolio at 20%.
Another consideration is massive costs on death. In the event that your estate is able to carry all those death costs, the properties have to then be transferred into your heir's names - whether it be a spouse or children or dependents - and there's then conveyancing fees. There are mortgages that may have to be settled and cancelled and transferred. If you look at all those sorts of obstacles and hurdles that you create by acquiring a portfolio in your own name, I think it's just not ideal common-sensically.
Then you have the close corporation or Pty Ltd. The problem with most investors that we come across that use this structure, they are oblivious to the fact that it is not the ideal structure from a sale perspective. If you then sell the property, the capital gains tax position is very, very high. That's 18.6% effectively, plus the dividend tax which brings it to around 31%. Also on the event of you generating rental income and you're in a cash flow position or cash positive position, you're going to always pay tax at least at 28% in a company or close corporation.
Trust
In contrast, if you put the property into a trust, a trust is the only entity in our law where you're able to distribute the income from the trust through to beneficiaries. You may have beneficiaries that have got very low tax rates or zero tax rates, and you're therefore in a position where you can create some tax efficiency by using a trust. So contrast CC company versus trust, tax-wise a trust is the more efficient tool or entity to utilise.
We find people using CCs in companies not structuring the ownership. In the event that you are in a default position in a CC or a Pty, make sure that you address the ownership of that entity because you're exposing the portfolio to your vagaries, because you own the shares, or you own the members interest. On top of that - outside of the risk - upon your passing, the shares and the members interest will also form part of your estate, which will trigger the capital gains tax at 13.67, executors fees at 3.5% plus VAT, and the state duty at 20%.
In contrast, a trust doesn't die. It can continue in perpetuity, and you will not pay any of those death costs or duties, or taxes, or executors’ fees. In summation, in residential property portfolios, the ideal structure is a trust. Worst case, it's a company CC owned by a trust and hopefully never in your own name.
