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Many of my clients are high net worth clients, one even listed on the Financial Review Rich List. Many of them view property as a key factor for building and sustaining their wealth. I advise on the proper way to set up property investment tax structures to protect their money.
But it’s not just the super-rich who loves real estate in this country.
Josh Altman, star of the American TV Show MiIlion Dollar Listing: Los Angeles, was recently in Australia to speak about real estate. In an interview later, he described how he conducts these seminars all over the world, but it was only in Australia where after he spoke, people would run to the merchandise table to buy his products.
Running to spend money on real estate products! I think that describes our culture pretty well.
We’re real estate obsessed. We watch shows about it. We invest in it. We use it to create financial stability. But invest in property the wrong way, and you could lose all your hard-earned gains in one fell swoop from the government.
Ah, the Australian government. While everyday Aussies love the value of investing in real estate, the ATO loves it even more. There’s nothing the taxman loves more than reaping the rewards of all your hard work in renovating, listing, renting, and refinancing your property. At every stage, they have their long fingers pulling out profits that should (and can) rightfully be yours.
All this raises the question, what can you do?
It can feel like Sisyphus pushing up that boulder trying to keep the taxman away from your property. It’s a never-ending battle. And I should know because I was once on the other side of the desk from you.
I worked for 10 years as one of the bad guys in the ATO. It was my job to find more money from everyday Australians and take it from them. Hardly a satisfying task at the end of the day. After a full decade, I became extremely familiar with the tricks and techniques that the tax office uses to take large percentages of Australians’ incomes. Fed up with that practice, I left to start my own tax specialist practice.
I now consult and advise high net worth clients on how to minimize their taxes, protecting their wealth, and keep more of their income. I use my insider knowledge as well as my years of experience in tax laws (here and international) to help you set up structures to protect your wealth. I’ve been internationally recognized as well for my 100% legal tax strategies.
Now let’s look a bit further on how to protect your property.
When investing in property, you want to use ways to buy and sell your investments without losing tax dollars, valuable bottom-line money that should be yours. And before we talk about the tax structures that protect property investments, I should first point out some common mistakes I’ve seen people make.
One of the common mistakes I see people making is using a limited liability company or a “Pty Ltd” to buy and hold property.
And look, I get it. On paper, it makes sense. The reason people set up companies to create some distance between yourself and the assets you own. The company seems like a logical step to do what you want.
But watch out. It isn’t all what it seems
Companies may be popular for high net worth Australians to limit their tax burdens. And it works quite well for that. Individuals making a lot of money can attract a 48.5% tax rate, but companies limit that tax rate to just 27.5%. But the solution breaks down when it comes to your property.
Three little words can make or break your investment…
Capital Gains Tax!
As an individual, you have the ability to negate much of your capital gains tax burden when you sell the property.
But as a company, you have no exemption from the Capital Gains Tax discount. In fact, should you decide to operate a property investment through a company, you could pay up to 50% more taxes simply through the Pty Ltd name.
I had one client come to me, and this was after he had already made some bad decisions in the past. He was told that if he purchased a property through his company, it would work out better in the long run. Not so. In the end, he was burdened with a tax bill of $67,000. What stung, even more, was that he learned if he had purchased this property without the company, his tax bill would have been halved.
Now, I’d like to meet the guy who advised that purchase because, in my mind, he’s liable for half that bill. Unfortunately, I won’t That’s the reality of the industry. You get landed with the bill, not your accountants. It’s up to you to become the captain of your own financial ship, making your accountant accountable to you.
It gets worse.
Not only does CGT really hurt you, but once you try and draw money from your company, you also run into the Division 7A tax rates. This can get nasty really fast.
I heard of one client who tried to withdraw $200,000 from their company to make a down payment on a property. However, because they weren’t made aware of the Div 7A rates, they were taxed at the 78.5% tax rate applicable in that scenario.
Sure, you may create some distance between you personally and your company, possibly as a way to protect your assets from lawsuits and the like. But what you lose in the CGT eats away all the profits you’ve earned from rent, appreciation, and equity in the building.
Let’s instead look at a better solution.
“A real estate investor has two investment properties. If you add 8 more properties, what does the investor have? They have freedom.”
As a rule of thumb, using a family discretionary trust is still the best way to operate an investment property. You should seek out counsel before making any move, but in my mind, that’s the path you should take.
The trust owns the property - Ownership matters to the Australian government. And it matters in the courts of law. If you face a lawsuit, the suit will assess your assets and base the final decision on what you own. The good news is that if it comes to it, the trust owns the property, not the person. You can simply sack the trustee and protect the asset held in that trust.
The trust controls the profits - This is the true hero of the trust. Once you sell the property and earn some money, you can control how that capital gain gets distributed. Let’s say that Carol and Kevin own an investment property in their trust. Carol stays at home, making a few bucks a week buying and selling second-hand goods from yard sales. Kevin makes $150,000 a year in his job. Their property has sold and left them with $100,000 in profits from the sale. If Kevin were to pay that himself, his personal capital gains tax would be over $21,000. But he uses the trust to make his wife and kids beneficiaries, saving thousands on the CGT and keeping more money from the sale.
The trust can offset losses - While this may be true in some cases, it’s not always the case. If you hold a negatively-geared property, you can use the losses from that trust to offset the profits you make elsewhere. Let’s say that Kevin and Carol have two trusts. Carol’s taken up day trading and is making a nice profit in her spare time. If Kevin and Carol’s property trust is reporting losses, they can do what’s called a “family trust election”, and offset the losses from the property to minimize the taxes on the day trading profits. Timing is the key here, and it always helps to seek the counsel of a tax specialist.
If you’re a property developer, for example, you aren’t entitled to the CGT discount in any event. So using a company is far more common in that profession.
This is why you always get a professional advice before taking any steps. This leads to a (what I think should be fairly obvious) disclaimer:
This article is for educational purposes only. Tax structuring require a higher level tax specialist. Consult your professional tax specialist for your particular situation.
If you want to see the results other people see, do what they do.
Look at this article in the Sydney Morning Herald about the richest 56 Australians who lodged no income tax. In it, Peter Martin concludes that these individuals use higher level, “out of the box” tax specialists to handle their finances.
This is what we can do for you.
To learn more about saving taxes on property investments, speak to us at Wealth Safe. We use 100% legal means to slash your taxes and save you money. We can advise on the best strategies and structures to protect your wealth and keep your assets.
To speak to us, you can book a free 15-minute strategy sessions with one of our tax and sovereignty specialists. Simply complete our contact form and take action today.