Settle for limited liability
Question from Tee updated on 18th May 2020:
My wife and I have purchased our first investment property, settlement is in a couple of weeks. I've been told to look at putting the property in a limited company for asset protection. Is this the best idea? The property has been signed up under our own names. I’m not sure if this can be changed at this point in time.
Some quick background - if it helps. I work for myself through a limited company and my wife has a separate full-time job. This is a buy and hold long term investment and we are looking to purchase another property this year to start our portfolio. The mortgage is all arranged but, again, this is under our own names. The property should be only slightly cash positive but we’d be safer calling it neutral. So is a limited company the best fit? And, if so, would GST then be involved on the purchase price??
Our expert Matthew Gilligan responded:
As a general rule, we recommend that our clients settle investment property purchases into limited liability companies, rather than personally. There are several reasons for this. For one, it provides you with a means of protecting the capital that you inject over time. Any money of your own that you inject into the purchase, or over time, is treated as a loan from you to the company. Sometimes these shareholder loans can accumulate to significant amounts. You can assign the ownership of such a loan to a family trust to get asset protection.
Secondly, having the property and the borrowing associated to the purchase in a company means that there is clarity around the interest expenses associated with the rental activity. Where you have a rental property and rental borrowing in personal hands there is the prospect of the rental activity getting mixed up with your personal affairs and that can compromise the deductibility of interest. There are variables that will need to be determined in terms of the shareholding of the company and its tax status. You will need to seek advice on this.
If you have a couple of weeks before settlement, then now is the time to act, as if you move quickly to get the company established it is possible for you to nominate the company to settle the purchase and become the new owner. You will need to advise your lawyer and the bank as soon as possible of your plan to settle the property into the company so that documentation is prepared on this basis.
Finally, you ask if GST would be involved in the purchase price. From your perspective no GST is able to be claimed. In saying this, I assume that the property is a standard residential rental property and not a commercial property or one that you are going to rent out on a short term stay basis via Air BnB.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.