Tax and Asset Protection
How you structure your investment will have a significant impact on your potential returns and future growth. Many people rush out and buy a property then ask their accountant about how they should structure the purchase - this is most often too late. Prowealth has vast experience in the multitude of options for structuring your purchase to suit your circumstances. Effective structuring can allow you to own nothing yet control everything, but you must setup your structure correctly BEFORE you invest.
For example:
- The difference between buying in your own name, joint names, a company or a trust.
- The seven different types of Trust structures all with different benefits and how to use them.
- Why you should rarely buy an investment in your own name.
- How you can effectively protect your assets from creditors, taxes and lawsuits.
- How you can pass on your wealth to your children and have it protected.
- How use can use the right structure to protect business assets.
- How a Self Managed Super Fund may be of assistance to you.
Every situation is different. Prowealth consultants are trained to provide you an overview of the different options that may be available to you. Below is a brief summary of the different types of structures some of which is taken from the book 'How to legally Reduce you Tax' by Ed Chan and Tony Melvin of Chan and Naylor accountants.
Purchasing as Joint Tenants (Equal shares)
This is the most common form of property ownership and is generally a husband and wife each having a 50% ownership. The disadvantage is that tax deductions are limited to the percentage of the ownership you actually own. As a simple example, if there are $10,000 in deductions for a property, the husband and wife can only claim $5000 each, which, if the husband was the only income earner, limits his ability to claim maximum deductions.
Purchasing as Tenants in Common (in unequal shares)
To get around the above problem, many people have been advised to put the majority percentage ownership into the name of the highest income earner, for example 99% Husband, 1% Wife. The long term problem is that as the property becomes positively geared or is sold many years down the track, the income or profit is allocated as per the ownership % and could result (in this case) in the husband paying more income tax or increased capital gains tax.
Company Structures
A company is a completely separate legal entity, which is treated differently to an individual. A company is subject to different tax laws. One of the main differences is the tax rate. A company pays tax at 30% (2011) whether it earns $1 dollar or a million dollars, which could be of benefit to an individual paying the highest marginal rate of 46.5% (2011).
Trust Structures
A trust is basically an agreement or promise. The basic function of a trust is to separate ownership from control. There are many different types of trusts. Saying 'Should I buy my property in a trust" is a lot like saying "should I buy a new car". There are many types of cars they have different features, benefits and costs. Trusts are much the same, which trust to use will vary on your individual circumstance. Nobody owns a Trust, it is controlled. Trusts generally comprise of one or more Trustees and Beneficiaries. Here are the most common:
Discretionary Trust
- A Discretionary Trust allows the Trustee to decide who get what. The Trustee has full discretion to distribute both income and capital to whomever it decides and can vary it from year to year.
Unit Trust
- A Unit Trust is split into units, like a company is split into shares. Profits and income are distributed via the units to the individual. Unit Trusts are more commonly used for property investors and investors with Self Managed Super Funds.
Hybrid Trust
- A Hybrid trust is a cross between a Discretionary and Unit Trust. This type of structure is very appealing as it included the benefits of both and thus is extremely useful for business and investing.
Bare Trust
- Also know as a Declaration of Trust, a Bare Trust is a useful structure when ownership privacy is a concern. With a Bare Trust, the trustee must follow the direction of the beneficiary. Unlike other trusts, a Bare Trust is not required to do anything with the asset, the Trustee just holds the asset for the beneficiary.
Family Trust
- A family trust is almost the same as a Discretionary Trust with the exception that beneficiaries are restricted to family members.
Testamentary Trust
- Is a Trust set-up based on the direction of a Will (of the deceased) and is similar to a Discretionary Trust.
Conclusion
Every circumstance is different and we recommend you consult an appropriate licensed advisor before committing to any structure.
Note: it is an offence under the tax act to do something simply to avoid paying tax. Therefore, you must have a valid reason for using any structure other than just the tax aspect.