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Tax question every Aussie should ask before buying property

There's a tax thought Aussies should have before buying a property. Property guru John Pidgeon explains.

John Pidgeon in a green shirt in front of an aerial of houses.
Property guru John Pidgeon has reminded prospective home-buyers to consider their tax options first.

When purchasing a property, the ownership structure you choose to buy with is drawn out of your overall strategy. Be aware that the way you pay tax, and the percentage you pay, changes depending on your chosen ownership structure. Let’s take a look at the options available.

As an individual (compared with a family trust arrangement or similar), your property investing is grouped with all the other income you earn when it comes to tax, and you’re taxed at your marginal tax rate. Buying as an individual is generally the most common approach when buying a permanent place of residence (PPOR), and it won’t have any effect on your tax return because you are not earning an income from it.

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As a single individual, you would own the property in its entirety. All taxation matters are directly tied to you. Any rental income earned and associated expenses, positive/negative gearing, as well as Capital Gains Tax (CTG), are included in your annual income tax return and taxed at your personal marginal rate.

This approach allows two or more people to have a presumed equal ownership of a property.

A key aspect of this structure is that if one joint tenant should pass away, their share is transferred to the remaining joint tenants, overriding what the deceased joint tenant’s will says (right to survivorship). This is a common arrangement for married or long-term couples.

Rental income and expenses are divided equally among the joint tenants, and reported in each individual’s income tax return. Income and expenses are claimed equally, and CGT is divided equally between all parties.

A tenants-in-common approach establishes a co-ownership structure where multiple individuals own a property with distinct shares (typically expressed as percentages).

Ownership of the shares can be unequal. Unlike joint tenants, tenants in common do not have the right to survivorship should a member of the agreement pass away. The property does not automatically transfer ownership to the other tenants; instead, the property is managed in accordance with each individual’s will, through intestacy laws, or as specified in each individual's estate planning. When the property is sold, each individual receives their respective proportions based on the shares they own.

When you own a property as tenants in common, each individual bears responsibility for their specific share of income and expenses. Rental income, expenses, and CGT are allocated proportionally, based on each individual’s ownership percentage.

These financial components are then reported in each tenant’s individual income tax return.

Speaking generally, a trust is an obligation imposed on an individual or entity to hold property (and any other investments) on behalf of the beneficiaries of that trust. Trusts aren’t taxed in their own capacity but do generate taxable income, which is then distributed to beneficiaries.

Losses made by a trust in an income year are not distributed to its beneficiaries; instead, they can be carried forward and used to reduce the trust’s net income in a future year.

If you were to set up a trust structure, your main goals would generally be:

  • Asset protection

  • Profit distribution

  • Tax flexibility via discretion in relation to the distribution of assessable income and capital gains

  • Estate planning

Self-managed super funds (SMSFs) are a type of trust that, like all superannuation funds, are set up to prepare for retirement, so you won’t see cash flow dropping into your bank account pre-retirement with this approach.

When it comes to buying property through an SMSF, there are requirements to meet. You must be able to demonstrate that there are retirement benefits to fund members by investing in the property.

Lending for an SMSF also comes with strict guidelines, called a limited recourse borrowing arrangement (LRBA). The terms of your loan are more likely to require a larger deposit, involve higher interest rates and you will likely be required to lock into a principal + interest rate loan (usually at least 20 per cent).

It's also worth noting that trustees and their relatives cannot reside in a property owned by the SMSF.

The more records you keep relating to your property, the easier the overall accounting, tax and cash flow management will be. This enables you to achieve the best possible outcome when working with your accountant, and by documenting income and expenses regularly, you won’t be rummaging around toward the end of June trying to find all the documents you need.

Receipts tend to fade over time, so take a photo of them as soon as you receive them and upload them to a storage website, such as OneDrive or Google Drive, to refer back to when your accountant asks for them or tax time rolls around.

Don’t fall back on estimations and guesswork – know exactly how your property has performed by maintaining adequate records from the very start.

Edited extract from Sort your property out & build your future by John Pidgeon (Wiley $32.95), available at all leading retailers.