DIY Tax Structuring

It's always a good idea to make sure your tax situation is set up in such a way that you are getting the optimal tax result.  I like to review a clients situation when they become clients and each time their tax returns are completed to make sure things are set up properly.

However, if you wanted to look at your own situation yourself when purchasing a property, here are the basics of tax structuring.

When purchasing a rental property, the first thing to consider is your overall objective.  Is your main goal asset protection or tax optimisation?  If it's asset protection, then using a trust to own your properties is going to be the best option.  

If it's tax optimisation, then you need to prepare a rough budget to see if you rental property will make a profit or a loss in the short and long term.  This will mostly depend on the rental yield, the percentage of borrowed funds, the current interest rate and expected long term interest rates.

A rental property making a profit should go into a trust as you will pay no more tax than if you owned it personally but you also get asset protection.  If you wanted to keep things simply, you could own the rental property in your personal name or, if in a relationship, under the persons name that earns the least to take advantage of that persons lower personal tax rate. 

A rental property making a loss should either go into your personal name or a look through company. 

If in a relationship, the rental property should go under the persons name that earns the most to take advantage of that persons higher personal tax rate.  If using a look through company, then the person earning the higher amount would own 99% or 100% of the company shares.

So, for a rental property making a loss, you then need to decide between owing it under your personal name or a look through company.  Here are some of the factors of each option:

Personal Ownership

  • Any profit or loss flows directly through to the property owners
  • It's simple with no set up costs
  • Interest is tax deductible as long as the loan is used to purchase the rental property or to pay for rental renovations and upkeep

Look Through Company Ownership

  • Any profit or loss flows directly through to the property owners
  • We charge $299 incl gst to set up
  • Annual accounting fees are $100 plus gst more than personal
  • Annual companies fee of $45
  • Shareholding and therefore ownership can be changed in a simple and inexpensive manner
  • Interest is tax deductible as long as the loan is used to purchase the rental property, to pay for rental renovations and upkeep or to repay funds you transferred into the company at an earlier time

DIY Tax Structuring Ongoing Tips

Even if you get the right advice when buying your rental properties and get things set up right at the outset, there are still things for you to check over time to ensure your tax situation is still optimised.  

The following is a list of some of the things that I like to check at the same time as I prepare your tax returns each year:

Tax Deductible Debt

Ideally, you want as much of your debt on your rental properties and as little debt as possible on your personal home (as that personal home debt is not tax deductible).  So, you could consider ways of moving some debt from your home onto your rentals.  If your rentals are owned under a company, you could consider borrowing funds from the bank if there is a shareholders loan that can be repaid.  If there is plenty of equity in an existing rental,  that rental could be transferred to a company or trust.  The extra funds borrowed under both options would then be used to reduce the debt on your personal home.

Interest Only Rental Loans

Until the point where you have no more debt on your personal home, all rental property debt should be interest only so that any extra cash can be put into reducing your personal home debt first (as that personal home debt is not tax deductible).

Getting Max Tax on Losses

Any rental loss will be better utilised if it goes to the person on the higher personal tax rate.  If this is not the case and the property is owned under a company, then you could consider changing the company shareholding.  If the property is owned under your personal names then you could consider changing the ownership of the rental property to a company.

Paying Least Tax on Profits

Any tax on rental profit will be lessened if it goes to the person on the lower personal tax rate.  If this is not the case and the property is owned under a company, then you could consider changing the company shareholding.  If the property is owned under your personal names then you could consider changing the ownership of the rental property to a trust.

Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.