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Legal Tip 111: Ways to Structure Joint Ownership of Property

Discussion in 'Legal Issues' started by Terry_w, 2nd Jan, 2016.

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  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Ways to ‘buy’ property ‘jointly’ with another

    Many people wish to enter into purchases with other people. Sometimes other relatives and other times just friends. This can be a very good way to ruin a relationship as there are so many things that can go wrong, but it can also be a good way to progress.


    Joint Tenants – this is generally not a good idea as if one person dies the other will take ownership automatically and the deceased cannot leave their share via their will.


    Tenants in Common – this method of ownership is preferred to that of Joint Tenant as each party can leave their share of the property in their will.

    Tenants in Common ownership percentages doesn’t need to be equal either.


    Partnerships – there are 2 forms of partnerships, general partnerships and taxation partnerships. Partnership arrangements can allow profits to be distributed in a way different to legal ownership. Partners can be individuals or companies or trustees.


    Discretionary trust – generally not a good idea as there are no fixed entitlements. Whoever controls the trust will generally control who gets access to the capital and income of the trust. But where one party wants to exit the arrangement this is generally the best structure as there are no CGT and stamp duty implications – in general (there can be depending how it is done).


    Two trusts as Tenants in Common. This structure is useful as each family’s trust can have a fixed share of ownership and a percentage of profit flowing into each trust and then the trustee can decide where the income should flow. The type of trust used will be each party’s decision but could be a unit trust or a discretionary trust. The owner of the property could be the trustees of 1 unit trust and 1 discretionary trust for example.


    Fixed Unit Trust – this can allow the trustee company to legally own the property and for each ‘partner’ to own fixed entitlements to the income and capital of that trust so each family would have a separate beneficial interest in the property. The units of the trust can be owned by an individual or by the trustee of a discretionary trust. The benefits here are that units can be more easily transferred than title to a property. So if one partner wants out they can sell their units to the other partner. Title to the property can remain the same. Transferring of units will result in CGT or income tax, but can be done with no stamp duty or much less stamp duty than transferring title.


    Hybrid trusts. These can be structured in multiple ways. One example may be discretionary allocation of income, but fixed entitlements to capital.


    Loan agreements – rather than structuring ownership, one party could simply lend money to the other party that will own the property. Profits can be shares by charging interest. This is perhaps the simplest way to structure things as once the project is complete the loan can be refinanced with a bank and the money lender paid back.


    Joint Venture Agreements – these are complex from a legal and tax point of view, but one party can own the property and the other party can develop the property for a fee. If structure well the fee can be deductible to the owner of the property and be income to the developer. The benefit with this approach is that it can be used for property already owned without triggering stamp duty or CGT – but legal advice is needed as sometimes duty can be triggered.


    SMSF - A SMSF can own property, but can only borrow to acquire property under strict conditions. A SMSF could potentially do a development but generally could not borrow to do so.


    Fixed Unit Trust with SMSF owning the Units. A SMSF can own units in a related Unit trust, but there are strict conditions and the Unit trust could not have any borrowings or mortgages.


    Fixed Unit Trust with 3 non-related SMSF owning units. Where a SMSF owns units in a unit trust and the SMSF, or a related party, doesn’t control the trust or the trustee then there are no restrictions on borrowings. The trustee could borrow to acquire property and to develop that property. The SMSF could even own up to 50% of the units as long as it did not control the trust – but 49% would be better. The SMSF could be one unit holder with the other 1 or more unit holders being other non related SMSFs or individuals or trusts. For example Paul could have $100,000 in super with Mrs Paul having $50,000. He could set up a SMSF with his wife. His investing mate might be in the same situation and he could set up a separate SMSF with his wife. And their family Doctor Jill could do the same. Each SMSF has $150,000. They all set up a fixed unit trust with a separate company as trustee and each SMSF subscribes for $150,000 worth of units. The Unit Trust would then have $450,000 cash and it could go out a borrow 80% LVR on a property (if it can meet lending requirements). This property could then be developed – house knocked down and 6 town houses build and sold. Profits could then be paid back to the unit holders which are the 3 separate SMSFs.


    Company with each party owning shares. Companies are worth considering as they have many advantages over trusts, but also some disadvantages too. Companies are generally not recommended because they do not get the 50% CGT discount, but that is often not available when developing or conducting a business. The other advantages with a company is that it receives a separate land tax threshold and it can retain income.


    Deed of partition – each owner to a property can enter into a deed with the other owners. This deed can allocate parts of the property to each owner so as to allow title to be transferred at the completion of sub-division. This can be done in a way to avoid or significantly reduce stamp duty and to avoid CGT being triggered. see Legal Tip 77: Joint Purchasers of Land and deeds of partition


    Combination of the above – in most situations a combination of the above will be needed. Nearly always a new entity will require funds to kick it off, so a loan agreement will be needed, A company as owner will need a shareholder – which would usually be a discretionary trust. This trust needs careful structuring too. Even just 2 individual owners may need advice on ownership percentages, loan agreements and deeds of partition.


    When deciding on what ownership structure you need to think both short term and long term. What if one wants to get out, what if we decide to keep? Using a discretionary trust to purchase in NSW may be fine if you intend to develop and sell, but if you change your mind and decide to keep one or more properties then you may be hit up for large amounts of land tax each year. So plan ahead, even if you think there is no chance of holding.
     
    Last edited: 2nd Jan, 2016
    Perthguy, Skuttles, Peter P and 6 others like this.
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Thanks for coverung the options of this detailed topic.
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Partnerships and JVs cant own property. Only partners that are legal persons can. eg company, trustee/s or humans.

    Technically speaking a trust cant legally own property either. eg ABC Pty Ltd ATF Smith Trust and ABC Pty Ltd ATF Jones Trust as joint tenants may be problematic. Jones Trust could lose its interest to Smith Trust and the legal title wont show any trust on title. Just ABC Pty Ltd as owner. Legal solutions are available.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    A trust is just a relationship between A and B and relationships (in equity) are not legal persons
     
  5. Peter P

    Peter P Well-Known Member

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    Hi Terry,

    Thanks for sharing your legal tips, really appreciate all the advice, they've been very useful.

    Me and my wife own, as joint tenants, a property with 2 houses on 1 title, 1400m2. Previous owner was in the process of a DA approval but did not complete. We wish to subdivide the property in order to build a gf on the backyard of each house.

    I heard that we should change the ownership from 'joint tenants' to 'tenants in common' 50/50 before the subdivision because it works out better. I didn't understand why, I've scoured the internet for more information, spoke to the solicitor but couldn't find anything! Is this true? Would you be be able to shed some light on this scenario.

    Cheers,
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    From a tax point of view JT is the same as TIC 50/50.

    but the benefits of TIC are 2 mainly:
    1. Asset protection if one is about to die and the other is about to go bankrupt. You could save half the house if it was TIC.

    2. Estate planning - a TIC could leave their share to anyone, including a discretionary trust under a will so there are asset protection and tax advantages.

    There should be no stamp duty differences - non that I can think of.
     
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  7. Peter P

    Peter P Well-Known Member

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    Thanks!
    Who is the best person to approach to make the change from JT to TIC?
     
  8. York

    York Finance Broker Business Member

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  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You will have to talk to your bank first if there is a mortgage on title.
     
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  10. S0805

    S0805 Well-Known Member

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    Hi Terry,

    Running through number of scenarios on upgrading our PPOR, due to serviceability I've no option left for now but put my wife on the loan. I'm high earner compare to my wife.

    Joint tenants:
    -I assume by default this is 50/50 allocation between spouse. If down the track I need to borrow against equity of this PPOR for investment purposes can it be drawn only in my name (for effective tax savings) or it has to in both names cause that's how its setup.

    -From above, If equity has to be drawn in both names then can this be overcome by doing single name on Title and 2 on loans.

    Tenants in common (50/50) or any other percentage:
    -Let's say 50/50, If down the track I need to borrow against equity of this PPOR
    for investment purposes can it be drawn only in my name (for effective tax savings) or it has to in both names cause that's how its setup.

    -If equity has to be drawn in both names does TIC also has the option of single title and 2 on loans.

    i like TIC given it provides estate planning & assets protection however my primary objectives are
    -ability to draw equity out of PPOR just in my name to invest
    -ability to buy back/transfer entire loan in my name. In that way release my wife's serviceability so i can transfer positive geared properties in her name....
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Class Discretionary Trust is another one Terry.

    CDT can be ideal for non-related couples (eg two couples). Each "Class" ie family can have a fixed right to share of income / expenses and then each Class may seperately determine to distribute to its class members as a discretionary trust. One class can be +ve geared and other -ve geared.

    Benefit is a single Co trustee. Fixed Rights like a partnership etc but limits include control of the Trustee and appointment powers etc. Best deed I have seen includes a guardian who is independent of Class A and B and changes to some deed power need the consent of all classes and the guardian.

    A CDT works well from franchises but in NSW it doesnt get a land tax as its not a fixed unit trust for land tax. For non-NSW land it can work for land tax
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    In JT there is no separate ownership –each own the whole.

    If JT and you want to borrow down the track then since there are 2 owners their must be 2 mortgagors. This means lenders will lend to both or to one with a security guarantee from the other.

    If TIC in whatever share it is basically the same. Technically a TC owner could mortgage just their share of the property, but in practice no banks would lend for this so both on title = both on loans or 1 on loan with a guarantee from the other.

    If you want to further borrow in the future then you have to consider whether this will be possible due to servicing. If you think it could be then having 1 name on title with 2 on the loans now may mean you can borrow later without involving your spouse and may even be able to take the spouse off the main loan.
     
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  13. S0805

    S0805 Well-Known Member

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    thanks Terry. I understand that both serviceability will be affected in full amount.

    ^ This is what i prefer.....& I'm optimistic that my serviceability will improve over time. Rather than waiting for that time, we want to upgrade our PPOR now and down the track want to have option of removing my wife's name from loan all together.

    So basically having one name on title (high earner) & 2 names on loan (high & low earner) is possible in both JT & TIC scenario??
    By having 1 on title and 2 on loan can I also have equity drawn in my name only for tax purposes...?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    One name on title means sole owner - it couldn't be JT or TIC.

    One name on title can still allow 2 names on the loan if the other borrower is your spouse (not all lenders will allow this).

    You could have one name on title and 2 names on loan and then later set up a new loan to borrow further with just one name (legal owner) on this loan.
     
  15. S0805

    S0805 Well-Known Member

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    thanks Terry. got it. I was getting confused with one name on title and 2 on loan as joint ownership.

    How easy it is to remove the spouse from loan down the track. Is that just a refinance subject to serviceability for other spouse. I gather given this is PPOR & in VIC so as per current rules shouldn't cause CGT/stamp duty issues either..or is it more to remove the spouse from loan?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It should be easy to remove a spouse - just a refinance (could be an internal refinance or to a new lender). Just subject to a new application so new qualifying.

    Changing borrowers won't change title so no stamp duty there and not a CGT event either.

    One question is the deductibility of interest - you should seek tax advice. Before you borrowed with someone else now you are on your own. Could the ATO argue that only 50% of the interest is therefore deductible? Unanswered questions...
     
  17. S0805

    S0805 Well-Known Member

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    this is for PPOR so no issues with tax destructibility.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    In that case your tax must be indestructible.
    No change of ever moving out and renting?
     
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  19. S0805

    S0805 Well-Known Member

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    On the 2nd thought i think you are referring to borrowed equity used for investment purposes from this PPOr loan or are you not.....even if its is i thought name on title defines the deductibility or its not...
     
    Last edited: 5th Jul, 2016
  20. S0805

    S0805 Well-Known Member

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    lol:)....Plan is to have this PPOR last us for life given we are upgrading now.. but i guess never say never