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.