Ownership of Investment Properties and Capital Gains Tax
The type of ownership of an investment property is so important, because it directly relates to the tax planning opportunities that exist! There are a few ways that you could own an investment property:
- As one/multiple individuals
- As a company
- As trustee for a trust
- As a superannuation fund
The entity level ownership is different to the legal ownership structure, and the difference between joint tenancy and tenants in common should always be discussed with your conveyancing lawyer on purchase of the property.
One of the many reasons that ownership is important is Capital Gains Tax implications. As we mentioned in our Advanced Negative Gearing article, capital gains tax is not strictly a tax, but a method of calculating tax, and a beneficial one at that!
For example, you bought a property for $500,000 and sold it for $700,000. In basic terms, you made a total capital gain of $200,000. Now, where capital gains tax is beneficial, is that there are many ‘concessions’ that exist, the most relevant of these that relates to property is the CGT Discount method. This calculation allows up to a 50% discount of the total gain if the property was owned for 12 months or more and the event happened after 11:45am on the 21st of September 1999. The discount rate depends on the type of ownership:
- Individuals receive a 50% discount.
- Trusts receive a 50% discount.
- Self-Managed Super Funds receive a 33.33% discount.
- Companies receive no discount.
See now why ownership is so important? Back to our $200,000 total gain on our property. If this was owned by an individual, they would only be taxed on $100,000 after applying the discount, same for a trust. A self-managed superannuation fund would be taxed on $133,333, and a company would be taxed on the whole $200,000 gain.
Even if the individual was in the highest tax bracket (45%), it would mean they only pay $45,000 tax on the gain ($200,000 x 50% x 45%), meaning they paid an effective 22.5% tax ($45,000 / $200,000). Many people think a company pays less tax because the rate is around 27.5%, but in this situation that would actually cost you more than owning it individually.
Note, the above is not intended as advice and is purely general in nature, every circumstance is different and specific advice should be sought in all individual situations, see our Disclaimer page for more.