Join Australia's most dynamic and respected property investment community

Legal Tip 4: Ownership Structure

Discussion in 'Legal Issues' started by Terry_w, 22nd Jun, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    Well before purchasing the next property you need to consider who will own it. Leaving aside non persons for the moment, for a couple there are just a few choices:

    1. Single name Spouse A
    2. Single name Spouse B
    3. Joint names Spouse A and B
    this could be either
    3a. Joint Tenants
    3b. Tenants in common in equal shares
    3c. Tenants in common in unequal shares
    Before deciding you should consider the consequences of each of the above in relation to
    1. Stamp duty in relation to restructuring
    2. income tax now
    3. income tax in the future as rents rise
    4. CGT in the future
    5. land tax now and in the future
    6. control
    7. Ongoing borrowing ability (most important)
    8. asset protection on
    a. bankruptcy
    b. family law
    c. incapacity
    d. death
    9. ability to transfer property into a SMSF

    Generally speaking going in single names can be a good idea because:
    1. In some states you can transfer between spouses without stamp duty. This can allow debt recycling strategies to assist with the paying off of the home loan sooner.
    2. Land tax can be minimised
    3. Extends serviceability in most cases
    4. Allows greater planning for tax minimisation on the sale of the property
    5. Can be greater asset protection
    6. If death occurs can allow greater planning to save tax for the surviving spouse and provide greater asset protection.
    7. Non owner can be on the loan as well. But this is a last resort and should only be done if absolutely necessary as it will greater hurt serviceability in the future and halve the asset protection.

    So, don't just take the short term view get the negative geared property in the higher income earners name - it won't be negative forever.

    And don't buy 99/1 or 90/10 as Tenants in Common as there is no real point. Owning 1% of a property is not much better than owning 0% but you will be stuck in the loan for the life of the property and this will hurt serviceability.
     
    Peter P, Lenny, Big Will and 4 others like this.
  2. jafeica

    jafeica Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    99
    Location:
    Sydney
    Thanks for the breakdown Terry. As someone who has so far bought only in my own name but will look at purchasing in wifes name down the track, I have a couple of queries about your post.

    Can you give me an idea of which states?


    As a general rule what would you say the minimum split should be to make it worthwhile to put the property in both names?
     
    Baker likes this.
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    VIC is the best state for stamp duty as no duty with transfers between spouses - owner occ or investment. In NSW it would only be stamp duty exempt if the main residence (at the time of transfer) and it ends up owned by both spouses as Joint tenants or Tenants in Common. Restructuring in QLD wouldn't result in deductibility of interest as it can only be transferred without consideration for the stamp duty exemption to apply - and it only applies going from 1 name to 2 names in equal shares.

    Min split to make things worthwhile - 50/50 but even then I would avoid it, especially in NSW as the debt recycling strategy can't work and for the other reasons above.
     
    Last edited: 22nd Jun, 2015
  4. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    88
    Location:
    Sydney
    Thanks Terry. This has given me something to think about.

    Would I need to see an account or lawyer to get more specialized advice and how much would it cost me to get these guidance? I'd like to make sure that we structure our first property up properly.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    A solicitor - cost is about $550 for a meeting.
     
  6. CU@THETOP

    CU@THETOP Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    227
    Location:
    Brisbane
    I respectfully disagree on this point. Purchased my current home on 99/1% in favour of her indoors. I kept 1% so we don't have to go down the guarantee/certification course as well as the fact my borrowing capacity was needed for the buy. Being self employed it acts as an asset protection strategy.
    Just sayin.
     
  7. willair

    willair Well-Known Member Premium Member

    Joined:
    19th Jun, 2015
    Posts:
    1,693
    Location:
    Brisbane..
    Like some people say,if you cant trust the person you wake up next too at 4 in the morning,who can you trust..
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    Good to hear different views. But do you mean you purchased with a spouse? Even if not on title a spouse can go on the loan. Being on the title means you must always be on the loan. If you are on the loan then it will have great effect on borrowing capacity later.

    Also asset protection is reduced because on the loan means you are paying the loan and that means a bankruptcy trustee may have more ammunition to argue resulting or constructive trust.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    Its not about trust, but strategy.
     
  10. The Silver Bear

    The Silver Bear Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    47
    Location:
    Sydney
    Does it make sense to add the other structures to the top post for completeness?
    Discretionary Trust
    Family Trust
    Limited Company
    etc
     
  11. willair

    willair Well-Known Member Premium Member

    Joined:
    19th Jun, 2015
    Posts:
    1,693
    Location:
    Brisbane..
    I agree 100%,everything is about strategy just like restaurants if you don't like the food or liquor prices or staff you just walk into the next one..
     
    Last edited: 27th Jun, 2015
    Terry_w likes this.
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    Yes it does. I was planning on covering this in a separate post, but got side tracked. Will write one up.
     
  13. Investig8

    Investig8 Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    109
    Location:
    Central Coast
    Unless you came home with them at 3 :eek:

    Great post Terry, definitely gives people something to think about. I feel also the longer term strategy has to be looked at from the perspective of asset protection, as "The Silver Bear" mentions, trust structures etc. As one accumulates duty and transfers won't be the only concerns, that would be a part of a longer "strategic" investment plan.
     
  14. The Silver Bear

    The Silver Bear Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    47
    Location:
    Sydney
    Awesome Terry, brilliant that you are going to all this effort on behalf of people you know and don't know.
     
    Lenny likes this.
  15. CU@THETOP

    CU@THETOP Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    227
    Location:
    Brisbane
    Being self employed I can effectively choose where the income is distributed. I take your point on the constructive trust but I find with the pesky receivers they seem to only chase if there is " a feed in it" for them and there will not be protracted litigation/expense.
    Often bankruptcy doesn't happen overnight so you will have a heads up on the slow motion bullet. Certainly, a disposal of 1% of the property at market value outside of the 6 month claw back period will be hard to set aside where valuable consideration has been transferred. Minimal stamp duty as well. It will be hard to imply a constructive trust in the absence of solid evidence to support the claim. It may have been a property that should have been 100% in spouses name in the 1st place but due to lending constraints I had to come on board at 1% to make the deal happen.
    I agree there is an impact on borrowing capacity but my view is that given I am effectively the sole income earner I don't want the bank loaning me too much money in any event. Borrowing criteria are in place for a reason.
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    Hi CU

    It is not so much the bankruptcy aspects of the 1% owner as it doesn't amount to much. Even if the 1% owner were to go bankrupt the trustee in bankruptcy would allow the other spouse to buy out the 1% share. But the real issue is where the repayments cannot be met on the house. Then both of your not being able to afford the repayments would mean you both go down - the 1% owner for no real reason.

    This would happen if the spouse was on title anyway, but it would preserve the other spouse - keep them clean in terms of credit for minor issues and possibly prevent bankruptcy at the really serious side.

    but the main reason would be borrowing capacity. If you are self employed you could direct income to the spouse so he or she could qualify for a loan in their own right. This would preserve borrowing capacity to get you further.

    Also in some states, such as NSW, you have the land tax issues too. Both owners as assessed as the primary owner for land tax - although I guess this wouldn't have much of an effect over all.
     
  17. Bookle

    Bookle Member

    Joined:
    5th Dec, 2015
    Posts:
    7
    Location:
    Melbourne
    Thanks for this post,

    My defacto partner and myself are about to start our investment journey together. We currently own 1 property each (in VIC), and we plan to buy 2 more properties (1st in VIC, 2nd interstate.. SA/QLD?) going forward. And not sell.

    Partner's salary is 2/3 of mine. Neither of us are in litigious careers. We intend to sign a financial agreement in the near future. No dependents. All loans will be joint.

    My question revolves around the ownership structure of the next 2 IPs.

    Option 1: Sole Ownership
    I own one, partner owns one.

    Aware of the greater flexibility tax-wise doing this, and serviceability advantages.
    But we're both concerned about the lack of control re: the property we do not own. The workarounds & legalities around this is where I'm feeling a little lost.

    Would signing a pre-nup fix this (ie. give the non-owner a say over the property's decisions)?

    Otherwise can we each lodge a caveat over the property we do not own? To my understanding, by doing so the non-owner must consent as well before a decision is made. Will that be very costly and will it complicate serviceability / refinancing / transactions? Do we have to remove the caveat every time we refinance? Then reinstall it?

    Option 2: Tenants in Common
    IP3 90/10
    IP4 10/90

    This was my alternative structure if I find the legalities around sole ownership too confusing. Gives control while allowing us to still play around with offset strategies.

    Downside is poorer asset protection, possible serviceability issues and less flexibility with taxation.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    You can only lodge a caveat if you have a caveatable interest in a property. A lender won't lend if there is a caveat, but it can be removed and relodged after settlement. But under the loan agreement the owner will have promised to do everything they can to remove a caveat if one is lodged.

    I have written something about caveats on spouses property here
    Legal Tip 84: Caveats on property owned by Spouses

    A Binding Financial Agreement (prenup as you called it) won't prevent the owner from dealing with the property.

    See my other legal tips
    Legal Tip 111: Ways to Structure Joint Ownership of Property

    Legal Tip 68: Avoid 99%/1% ownership of property
     
  19. dean2012ad

    dean2012ad Member

    Joined:
    31st Mar, 2016
    Posts:
    20
    Location:
    NSW
    So for example:

    Jimmy and his wife buy an IP in NSW as 'tenants in common' 99/1 % High income / Low income respectively for the negative geared property.

    Later Jimmy and his wife move into the IP. They want to change to 50/50 ownership (tenants in common or joint tenants) to reduce CGT on later sale, and rent out a separate granny flat making a portion of the property positive geared.
    Is stamp duty payable?
     
  20. larrylarry

    larrylarry Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,501
    Location:
    Sydney
    It would be best to see @Terry_w in person to discuss the specifics and loan structure. It'll be money well spent.