When purchasing an investment property, what is the most appropriate ownership structure to maximise tax benefit?

Asked by Shane Gold Compliance Officer at First State Super
If the property is jointly owned in equal proportion by both spouses, the spouse with a higher income (higher personal marginal tax rate) would receive greater tax benefits when claiming a tax deduction on relevant expenses. On this basis it would make sense for the spouse with a higher income to have the property 100% in their name. But on the other hand, when the property is sold and realised a capital gain, the spouse with a lower income would pay less capital gain tax.          However, in a scenario where the property is sold when both spouses have a low or no income (eg retirement), it would be best to have the higher income spouse owned the property 100% from the start. This scenario provides greater benefits in terms of claiming a tax deduction and paying less capital gain tax, which is a win-win scenario? Do you agree with my theory? Any advice or comments would be greatly appreciated. Many thanks Shane.     

3 Answers viewed 3.5K times with 2 subscribers

Davie Mach Owner at Machcostore
Voted by: Shane Gold

Hi Shane, 

It is always best to have the property owned under the low income earner as the Australian tax system is a progressive tax system. For example, the high income earner maybe paying tax at 46.5% rate (including medicare levy). Whereas, the low income earner maybe paying 33.5% rate (including medicare levy). 

Essentially, lets say the investment property earned you $5000 in net rental income.

High income earner will pay $2325 

Low income earner will pay $1675

This works the same way if the property was sold and capital gains tax was involved.

(Ofcourse there are tax offsets and other tax implications but this should give you the brief idea)

However, ideally the best advice depends on the situation and your family structure/income.

Always best to consult an accountant for advice before making any financial move. 

Long story short do not try to find the best tax benefits/deductions always try to find the best way to minimise tax payable "legally" :)


Hope this helps!

Comments : (2)
Shane Gold Compliance Officer at First State Super
Davie, thanks for your comments. You're right, a low income earner pays less tax on any rental income which is ideal for a cashflow positive investment property. On the other hand, a negatively geared property would not give a low income earner much benefit in tax deduction. Cheers Shane
Liam Shorte Director, SMSF Specialist Advisor & Financial Planner at Verante Financial Planning & The SMSF Coach
Tax should not be the primary driver. You need to consider the occupations of both and any litigation or financial risk. How long do they inten to hold on o the property? You need to consider if a Trust to SMSF may be more appropriate holding structure. You should also consider what happens when the property becomes positively geared?

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Ian Harris Director at B+I Lockwood Accountants
Voted by: Shane Gold

The dilemma with the above answer is the issue of negative gearing.

If the purchase is negatively geared then you want the property in the name of the taxpayer with the highest income.

In the utter , if you have paid down the loan this will cause a tax problem.

A unit trust structure may allow you to have your cake now and then have your cake in the future as well because there is a strategy with this structure for overcoming this problem.

Take professional advice!

Comments : (1)
Shane Gold Compliance Officer at First State Super
Thanks Ian. You're right, as each individual's circumstances are different. Seeing an accountant would be ideal in this scenario. Shane
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Craig Garbler Managing Director at Sterling Debt Advisory Pty Ltd
Voted by: Shane Gold Phil Joel
Shane, I must agree with Ian that professional(s) should always be consulted, particularly when investing hundreds of thousands of dollars!  Even if the advice totals a few thousand (at most), then this pails into insignificance against other costs such as stamp duty, agents fees etc, and can save you multiples in terms of tax savings. As with any investment, a prudent approach should be adopted when investing.  Utilise those with the right experience for the situation.  A good financial planner for overall investment strategy, a tax accountant for structuring, a reputable conveyance lawyer to protect your purchase.  Even consider seeking the advice of an independent buyers advocate (property adviser) - someone who knows the property market, the + / -, drivers, capital growth expectation, what's in planning etc, is it a fair price.  A property adviser may direct you to another property that offers better value for money, or better suits your objectives - whatever they may be. At our business Sterling Debt Advisory we see many an investment (property and otherwise) where you wish the client sought the input of a professional at the outset - this is not only relevant for individuals, but surprisingly for corporate clients that you would have thought knew better.  Investing hundreds of thousands of dollars does indeed require independent professional advice.  You're really short changing yourself if you don't.  Spend a dollar today to save you many hundreds down the track! Craig
Comments : (1)
Duncan Smith Director at Business Advice + Tax

Maybe you can elaborate on the advantages of a unit trust.

Other structures that may be suitable for holding an Investment Property are a Self Managed Super Fund (SMSF) or a Company.

Duncan Smith
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