Buying an investment property as a company can offer asset protection and taxation advantages, but it also has its fair share of downsides.
Before you buy a home or investment property, it’s important to consider whether using a different ownership structure might be beneficial. One structure worth considering is buying property as a company – not only does this offer personal liability protection for shareholders, but it can also offer some tax benefits in certain situations.
There are, however, several disadvantages you should be aware of before you decide to buy property as a company. This guide looks at everything you need to know about buying property as a company so you can decide if it’s right for you.
What are the advantages of buying property as a company?
The biggest benefit of buying property as a company is that it offers limited liability to the shareholders, i.e. the company owners. So if the company gets into trouble and runs up a debt, the extent to which you will be liable for that debt is limited to the amount you’ve invested in it. The company’s creditors are also unable to target your personal assets if they try to recoup their debt.
From a taxation perspective, there are certain circumstances where buying as a company may also have benefits. For example, let’s say a property is purchased by a group of investors, some of whom live or work outside Australia. If the property is bought in their own names then they may have to later pay capital gains tax (CGT) on the property not only in Australia, but also in the country where they reside. Buying the property as a company and paying corporate tax to the ATO could simplify the process.
The corporate tax rate in Australia is 30%, which is substantially less than the highest marginal rate for individuals. You could also claim franking credits on dividends the company pays from its after-tax profits.
What are the disadvantages?
The main disadvantage to owning property through a company is that you can’t access the 50% CGT discount available to individuals when they hold assets for more than a year. This could potentially result in a larger tax bill at the end of the financial year. Any losses you incur will also need to be offset against the income the company earns.
There’s also the issue of home loans to consider. It’s usually harder to get approval for a home loan under a company name than it is under your own name. There’s also the chance that you will be referred to a bank’s business banking division, rather than being offered access to a standard home loan. As a result, higher interest rates and fees may apply.
There are several other ownership options you should consider when buying an investment property, including:
- Owning property in your personal name. This often presents a simple approach and makes it easy to obtain financing. You can borrow a large percentage of the purchase price and take advantage of negative gearing, but there is limited asset protection available.
- Owning property through a trust. This increasingly popular ownership structure is tax effective, allowing you to split the profits however you like, and provides protection for your assets. It can also make estate planning a whole lot easier, but on the downside it doesn’t allow you to take advantage of negative gearing.
- Owning property through a self-managed super fund (SMSF). Buying property through a SMSF allows you to take advantage of low tax rates and excellent asset protection. But SMSFs can be complicated to maintain and you will typically need a larger deposit and attract higher interest rates when borrowing.
Each ownership option has its own benefits and drawbacks, so it’s important to seek professional advice tailored to your situation.
Choosing the right ownership structure
Choosing the right ownership structure for a home or investment property can be a complicated process. There are a number of financial, tax and legal complications that need to be considered, along with your own investment and ownership goals.
The best thing you can do when deciding on an ownership structure is to seek professional advice from a taxation or investment expert. He or she will be able to consider your goals and your financial situation before helping you decide whether buying property as a company is the right approach.