Purchasing Structures
As you know, many people buy a property as a single individual or as joint owners (husband and wife or defacto couples). There are other business structures or vehicles however, through which you can acquire residential or commercial property – depending on your needs.
Instead of joining one of the major superannuation funds widely available in Australia, you can if you choose, set up your own SMSF. This is not a light decision to make and you need sufficient knowledge, skills and funds to set up and manage a competitive SMSF that will provide sufficient funds for your retirement.
SMSFs are regulated by the ATO and require an annual audit. You will need specialised financial and legal skills to manage your own SMSF.
The benefits of a SMSF are:
- You have control over the management of your investment funds
- Using a legal document called a Bare Trust Deed – you can borrow money to acquire commercial or residential properties for your SMSF
- If you are self-employed, your income tax is reduced through concessional contribution deductions
- The possibility of conducting business through the fund – if the Sole Purpose Test of the Superannuation Industry (Supervision) Act 1993 is complied with. The sole purpose of a superannuation fund is to provide retirement benefits for their members when they reach retirement age. All decisions must be directed wholly to this objective. Sometimes, this can be a difficult position to establish, depending on the activities of the SMSF.
When borrowing money through a SMSF BARE Trust Structure or a corporate entity the Lender will require a guarantee to be given by the Bare Trustee and or by the officeholders of the Company. This will require the provision of independent legal and financial advice from a separate firm of solicitors and accountants and we are unable to provide this advice and to also avoid any conflict of interest between those parties.
Discretionary Trusts or Family Trusts
These are usually set up to benefit family members and are one of the most popular small business structures in Australia. Usually a husband and wife control a Family Trust.
The benefits of a Family Trust are:
- It provides family asset protection
- If the trust holds income-generating assets, the tax burden can be shared amongst family members, thereby reducing the family marginal tax rate
- Family members (individuals) still retain the 50% Capital Gains Tax exemption relating to the 12 month holding rule
Unit trusts
These are similar to Family Trusts but are for businesses rather than families. With this type of Trust, a number of investors pool their money to create a Unit Trust. Family Trusts, companies or individuals can hold units and you can buy and sell these units. They are usually set up for commercial properties and investments.
The benefits of a Unit Trust are:
- It provides family asset protection
- They accommodate various family groups involved in business or joint venture enterprises
- It provides the effective retention of assets used in Unit Trust business or investment ventures
A company structure offers more legal protection when buying or selling property than doing so as an individual. If you are running a business and the business gets into financial trouble, as an individual you are legally responsible. A company is a separate legal entity and limits your legal responsibility in times of financial trouble.
The benefits of a Company are:
- It provides family asset protection
- A company accommodates various family groups involved in business
- A standard tax rate of 30% applies which may be used to effectively delay paying tax in high income earning situations