- Everybody knows that investing in property is a working way for a guaranteed financial growth. But with the many benefits, there come some disadvantages as well.
- Among the benefits of purchasing property as a company are aspects such as tax deductions, lower tax rates and many more tempting factors.
- However, there are also downsides to purchasing property as a company. And among those are higher fees and charges as well as higher tax rates if not used, so beware before you choose which way to go.
Investing in property is one of Australia’s most preferred methods of financial growth, with many of us striving to own a string of investment homes. But with a whole host of benefits available to business owners, could you actually be better off buying property through your company?
As Managing Director of Biggin and Scott Knox, I have had the opportunity to work closely with a wide range of savvy business owners looking to utilise the many financial discounts and incentives on offer from the Australian Taxation Office (ATO).
While tax breaks involved with buying an investment property are fairly common knowledge, the perks of buying property through a company tend to be less known. Generally, these structures can be much more complex in their initial set up, but financially speaking, I firmly believe it could be well worth your efforts in the long run.
Before making any major decisions, it’s important that investors seek professional advice from a trusted tax and finance expert that is tailored to your unique circumstances. However, in my experience, it helps to be aware of some of the main advantages and drawbacks of purchasing property through your company before you schedule your next consultation.
Here is a list of the pros and cons to help you identify whether purchasing a property through your company might be the best option for you.
1. Buying through your company is a tax deduction
One of the biggest benefits of purchasing a property through your business is the opportunity to access some excellent tax deductions.
Essentially, owning property through a company allows you to arrange high mortgage repayments and high rental repayments. Not only will you repay the mortgage at a faster rate, but by keeping the rent payments below the mortgage repayments, you will also be entitled to access the benefits of negative gearing, thereby reducing your income tax under a company structure.
2. Reduce tax on positive gearing
In the event that a property you want to buy will be positively geared and the rental return is higher than your mortgage repayments, purchasing the property in your own name could result in you paying up to 47% on the net income.
However, for properties with a positive cashflow that are purchased through a company, income tax is capped at a significantly lower 27.5% – which could mean a great deal of difference to you take home earnings.
3. Reduce tax on capital gains
When purchasing and selling property as an individual, any capital gain made is treated as taxable income, and consequently is subject to capital gains tax. While there are a small number of discount exemptions available, there are far more on offer when the property is purchased through a company.
When an asset is actively used in the business, the capital gains tax is reduced by 50%. Furthermore, if you hold on to the property for more than 15 years, or are selling it due to retirement or permanent incapacitation, you may be exempt from paying the capital gains tax altogether.
For those looking to develop a property, it is worth noting that there are no capital gains tax exemptions when doing so as an individual – and you could see a hefty sum of your profits are absorbed into tax.
4. Limited liability
Another perk to buying property as a company is that you will be able to maintain limited liability should the business find itself in hot water. If the company was to get into trouble and run up a debt, you as an investor will still only be liable for the amount of which you have invested.
Many investors take great peace of mind in knowing that should something go wrong, the company’s creditors will be able to target their personal assets. Your home and investments separate from the company will all remain completely safe.
5. Distribute profits to save on tax
In some instances, purchasing a property through your company may allow you to distribute profits to a partner or family member to help you lower your required tax payments.
While there are a number of provisions surrounding this kind of benefit, carefully planned arrangement may allow you to share you high-income earnings and assets with a family member of a lower income, placing you in a much lower tax threshold.
1. No tax discount when not used for business
While you may be eligible for an exemption or discount when the property is used for business purposes as discussed earlier, if it is not, you will be solely responsible for paying the full capital gains tax on the property.
Without the 50% discount offered to property that is purchased through a company and used for company business, the earnings on capital gains can be heavily impacted. For example, with a property, which makes a 200k profit when sold, you need to pay capital gains tax on the full amount – whereas one entitled to the discount would only need to pay tax on 100k.
2. Higher rates and fees
Another important factor to be aware of is the reality that it is much more difficult to get a loan in a company name than it is as an individual.
Generally, you will be referred on to the business banker, who will usually have much higher rates and fees – despite the fact that there is actually very little difference between buying property in your own name and buying in a company name.
3. Higher costs of tax returns
Finally, when purchasing a property through your company you can expect to be hit with much higher costs of company tax returns as opposed to personal.
Over the course of the year, if you spend any profits you make from the property you will need to pay tax on the dividends you take as well. While this may seem small, these sorts of things add up over time, so it is well worth looking at the big picture and staying on top of your earnings throughout the financial year.
For myself personally, purchasing property through a company has worked out extremely well, however, I believe it’s important to have a clear plan of action and a written agreement in place.
Recently, I entered into arrangement alongside numerous shareholders, where together we purchased a large property in Bayswater that we successfully subdivided and developed into townhouses. The property was purchased under a company name for a few different reasons.
- Firstly, doing so allowed the money to be far more easily distributed.
- Secondly, it allowed us to create an arrangement that would operate according to how much money we had personally invested. This way, we were all aware of what percentage of the property was ours, and at the end of the financial year, we could split the costs of the tax return depending on our percentage.
- Thirdly, it allowed us to access tax benefits and incentives that we couldn’t have if we had purchased the property as individuals.
The properties have since been sold, and I am pleased to say the result earned myself and the other shareholders a great profit. In fact, the arrangement was such a success that we are now getting ready to utilise our profits and purchase another property for development.
As a final word, my advice, should you choose to invest in property through a company, is to always look for a large piece of land that can be developed down the track. While there will always be a variety of different features that appeal to different buyers, a large piece of land offers an abundance of options that are becoming increasingly hard to come by, and will always earn you a great profit when you ultimately decide to sell.