Pros and Cons of Buying Properties in Australia through a Company

Investing in property has long been considered a safe and effective way to build wealth in Australia. While many homeowners and investors have traditionally purchased properties in their own names, there is a growing trend of Australians buying property through a company. In this article, we will explore the pros and cons of buying properties in Australia through a company, providing you with valuable information to help you make an informed decision.

Pros of Buying Properties through a Company

1. Tax Deductible

One of the significant benefits of buying a property through a company is the ability to enjoy attractive tax deductions. By purchasing a property through your business, you can arrange high mortgage and rental repayments, allowing you to pay off the mortgage more quickly. This also enables you to keep rent payments just below the required rate of mortgage repayments, facilitating negative gearing. By doing so, you can reduce the amount of income tax you have to pay.

2. Less Capital Gains Tax

When buying or selling a property as an individual, any capital gain is considered taxable income. This means you have to pay capital gains tax on the gain. However, if you buy a property through a company, there are several tax exemptions and discounts available. If the property is used for business purposes, the amount required to pay for capital gains tax is reduced by 50%. Additionally, if you keep the property for at least 15 years or sell it due to permanent incapacitation or retirement, you may be exempt from paying capital gains tax altogether.

3. Lower Tax when Positive Gearing

Positive gearing occurs when the rental return on a property is higher than the amount required to make mortgage repayments. If you buy a property through a company and it is positively geared, you will pay less tax compared to buying it as an individual. Individuals who buy a positively geared property in their name may be required to pay up to 47% of the net income in tax. However, for a business that purchased a property with positive cash flow, the tax rate is much lower, capping at a maximum of around 27.5%.

4. Profit Distribution to Save on Tax

Buying a property through your business may enable you to distribute profits to family members or your partner, reducing the amount of tax you have to pay. By sharing assets and high-income earnings with a family member who has a lower income, you can lower your tax threshold and pay less tax. However, there are certain caveats and provisions that affect the extent to which you can do this, so it is important to consult with your accountant to devise an appropriate arrangement.

5. Limited Liability

When you purchase a property on behalf of your company, you retain limited liability if your company faces financial difficulties. If your company incurs debt, you will only be liable for the money you personally invested, protecting your personal assets from creditors. This provides peace of mind to investors, ensuring that their private home and investments remain separate from the company and are completely safe.

Cons of Buying Properties through a Company

While there are several benefits to buying properties through a company, there are also some drawbacks to consider:

1. Higher Fees and Rates

Securing a loan in the name of a company is usually more difficult compared to borrowing as an individual. Lenders often refer company borrowers to business bankers who may charge significantly higher fees and interest rates. Despite there being no significant difference in terms of the actual purchase of the property, the higher fees and rates can impact the overall cost of the investment.

2. No Tax Discount for Non-Business Use

If the property purchased through a company is not used for business purposes, you will not be eligible for certain tax discounts. While you can enjoy a 50% discount on capital gains tax if the property is used for business activity, you will have to pay the full amount of capital gains tax if it is not. This can significantly impact the attractiveness of the investment, as you would need to pay a substantial amount of tax on the entire capital gain.

3. Higher Costs of Tax Returns

When buying a property on behalf of your business, you may incur higher costs in terms of company tax returns compared to personal tax returns. Throughout the year, if you spend any money accrued from the profits your property generates, you will be required to pay tax on the dividends. While this may seem nominal, it can add up over time and increase your costs during tax assessments.

It is important to note that the success of buying a property through a company depends on whether the property is used for business purposes. If you plan to run a business from the property, it is crucial to carefully plan and consider all the aspects mentioned above. Seeking advice from a qualified accountant who specializes in business accountancy is highly recommended to make the best decision for your specific circumstances.

In conclusion, buying properties in Australia through a company can offer significant tax benefits and limited liability. However, it also comes with higher fees, no tax discounts for non-business use, and increased costs of tax returns. It is essential to weigh the pros and cons and consult with professionals before making any major commitments. With careful planning and expert guidance, buying a property through a company can be a lucrative investment strategy.