|Why you shouldn't acquire the property in your own name?
The majority of rental property acquisitions occur in the name of individuals. Despite the large number of disadvantages that this type of structure attracts it is still the most popular.
The following reasons are why you should avoid acquiring a rental property in your own name.
- There is NO flexibility in relation to the distribution of income.
- There is NO flexibility in relation to the distribution of capital.
- The property may be poisoned and therefore not able to be transferred to a superfund.
- The property is exposed to creditors.
- The maximum benefits of negative gearing are not achieved.
1. No flexibility in relation to the distribution of income
If the property is acquired in the name of an individual or individuals then the rent has to be distributed to the individual's in the proportions.
If, however, the property is acquired by a discretionary trust then the decision as to who receives the income is an annual one and can change every year. Flexibility is crucial when considering any tax planning opportunities.
2. No flexibility in relation to the distribution of capital
As with the income if the property is acquired in the name of an individual distributions of capital including any capital gain is assessed in the proportions set when the property was initially acquired.
Once again a discretionary trust will allow for the distribution of the capital including any capital gain amongst a wide range of beneficiaries. This is important as there could be significant savings in relation to any capital gain.
3. The property might be poisoned
A self managed superfund is prohibited from investing in a unit trust where the unit trust owns a residential property acquired from a member. If the unit trust owns a rental property that was originally acquired from an arms length third party then a self managed superfund could become a unitholder.
It is for this reason that every person acquiring residential real estate as an investment should consider a unit trust as the structure for acquisition.
4. The property is exposed to creditors
If the property is acquired in the name of individuals it is subject to any litigation against that individual. If, however, the property is acquired in a discretionary trust then the assets of the trust are not subject to claims against any beneficiaries.
5. The maximum benefits of negative gearing are not achieved
The maximum benefits of negative gearing including the ability to refinance and borrow for private reasons is not available if the property is acquired in the individuals name. This is especially important since the ATO released Income Tax Ruling TR2003/9.