Legal Tip 356: Decide on Ownership Structure before Signing Contracts

Many many people seek advice on ownership structuring after they have actually signed the contract to purchase a property. This is potentially costly, especially in some states such as QLD as changing the settlement entity to the contracting entity will result in double stamp duty being payable – or one lot of stamp duty on the contract and another on the settlement if different.

WA is also pretty strict about this too.

NSW is more flexible where spouses are involved but if a trust is involved it becomes more complex and could result in double duty too.

VIC is the most generous states out there as often there will be no double duty even where a property is onsold before settlement if the price hasn’t been increased. But if any development has occurred after signing, DA’s lodged etc, it can be treated as a sub-sale and double duty will arise if this happens.

There are also many other non-duty reasons why you should not sign and settle in a different name.

One is trust law – where A provides the deposit and B settles on the property there is a presumption that B is trustee for A under a resulting trust. This can bugger up asset protection.

There is also a CGT event where A contracts and B settles. Usually this won’t be an issue on a short contract, but it can be on a long one when values increase. There is also the burden of needing to record it.

Loan approvals need to be arranged too and it is only possible to get the approval in the name of the entity if it exists – you can’t get a preapproval for a company if that company hasn’t been set up yet.

Note, that there is a strategy of doing this deliberatly as an asset protection strategy. Contract in the name of X when it was always intended for Y to own the property. Y can't be sued for breach of contract if Y is not part of the contract.

In summary, think before you contract

 

I have seen people buy land to develop and ask several months later if that was a good idea to buy in the anme of X. I cant answer that and it proves a point. It rarely ever is.

I think I just found a new tip : DONT sign a contract to buy property before getting legal (solicitors) advice not matter how urgent you think you need to act. This should address who is the buyer and whether you should sign. eg clauses of concern etc.....Signing conditionally, what you should include as conditions and even how its worded. Land tax adjustments are a common issue soliciors note. Contracts to buy land may need to consider if the potential use can even be permitted with council approvals. Many buyers assume. Solicitors are good at dispelling assumptions and may suggest certain immediate searches and information be checked.

eg Can I develop and use the margin scheme when I sell ? Or am I stuck with 9.09% of the sale as GST ? Can I claim GST on land when I buy ? ....

 

Good post Terry. Just to add one further point, sometimes circumstances are such that the future ownership can not be decided before sending a contract, so using the "and or nominees" can be quite handy to buy some time to finalise the actual ownership.

 

That is dangerous and should be avoided. It won't work, duty duty, in QLD or NSW and is not necessary in vic.

You should only sign a contract once the purchasing entity is set up and known - that entity should be the one signing.

 

Hi,

I have a few IPs in my name. I have plans to buy more in the next 12 months and think it is probably time to start looking at smarter ways to structure it. I'm starting early and getting the structuring advice ahead of time.

I have contacted a number of accountants and lawyers for advice and have found the following:
1. Some offer a free half hour consultation while some want to charge for advice from the get go;
2. All proport to be experts in residential property investing;
3. Very few deal seem to have half a clue about residential property investing; and
4. Some provide trust structure 'products' while others seem to self taylor everything.


Quick thanks to everybody, especially @Terry_w, for all of the info shared on the site - it really has help me spot a few turkeys claiming to be legal advisors.

When looking for structuring advice:
1. What's a good way to tell if an advisor actually knows about residential property?;
2. What is the normal fee structure if I'm looking for structuring advice for a purchase 6 months down the road? (I want to be fair to the advisors but don't want to be taken for a ride);
3. Should agents marketing structure 'products' be avoided or not?

Cheers

 

1. it depends on what you are wanting advice on. residential property is something different to ownership structure. Can you give an example of what you mean? Ownership structuring advice requires the advisor to be a lawyer with a practicing certificate, but no licencing required for residential property advice (unless legal or tax related)

2. I charge $660 for a consultation if not taking out a loan.

3. What is 'product'? Ask them can they modify a trust deed to suit your situation, if they can't then they might be getting a template designed by someone else can slapping on a few names - this might be a product.

 

Thanks Terry.

Sorry I was not clear. I am looking specifically for advice on ownership structures for residential property investing.

Right now, I need advice on how to structure my future IPs and some stock shares with my partner. I expect this will be some sort of overall plan which will be tailored to myself. It would need to describe the structures that each new IP will need to be purchased in (specific for properties in different states), how all the IP structures would be tied together with cash flows and would have provisions for future options such as bucket companies.

My intention is to get this game plan together now so when I have a new IP lined up for purchase in around six months time, I know exactly how to go about organising the structure. I may have wrongly assumed the advice would be largely billed for with the setup of the first structures for tax purposes?

Thanks for the advice on the 'products'. I'll definately ask about modifying the trust deed.