The concept of property is simple. It is a bit of dirt. However the legal ownership of property investing alters the tax impact considerably. And the tax outcome of property investment has a significant impact on your long term tax planning for a business family.
Green title
A green title property is the most simply of property ownership types. It effectively means that there are no common areas of the property that is shared by another property owner.
From a tax perspective the presence of green title simplifies matters a lot. The tax law associated with property is most often directed to green title ownership.
So when a property is green title the tax impact of that property is directed towards the tax structures associated with the property, the activities that are attached to the property (development or rental etc) or the intention of the entity that originally purchased the property.
Purple title
The presence of purple title changes the tax position. It is less common around Perth but still exists.
If you own a purple title property you do not own the property. Rather there is a company or unit trust that owns the property. The property is typically a multi-unit property that covers many individual properties.
Each “owner” of their property then holds a special share or a special unit in the company or unit trust. This special share gives the owner exclusive rights to inhabit and access a specified property.
If a purple title property is renovated and sold you might not be “selling” new residential real estate. You might be sell a share in a company – and that means the goods and services tax effect is less. GST does not apply to the sale of a share but it does apply to the sale of new residential real estate.
There are not many purple title properties in Perth. And they were typically created (by us at least) in the 1990’s to mitigate capital gains tax. At that time the holding company did not sell the land in question – it simply issued special occupancy shares to a specified individual.
The benefit of creating a purple title (back then) was that there was not a sale by the company to the investor.
If you are buying into a purple title property you need to review the shareholders agreements and covenants on the property. Also the presence of purple title can affect lenders as they might not be able to place a registered first mortgage onto your property.
In some instances purple title property can be sold free of stamp duty.
Strata and Survey Strata
A strata property means that there is some common property that is shared between different owners.
If you have a survey strata you are most likely to enjoy the same position as a green title property. And the tax effect of both will flow the same.
If you are in a strata title property you are sharing things like swimming pools, lifts and gardens. So there is most likely some contribution towards the maintenance and upkeep of these items.
The tax effect of contributions to a strata title will depend on what they were spent on. More likely than not the strata title fees will be tax deductible (when the property is attempting to generate rental income). However if the strata fees are being spent on major capital improvement’s then the fees incurred are not tax deductible.
This tax impact can change greatly depending on how the strata company operates and deals with the individual land owners.
Leasehold
A leasehold property generally gives the lease owner a long period of time to occupy the property – upto 100 years.
So in this instance the price paid for a leasehold property can be similar to the price paid for freehold. The benefits of inhabiting a property for 100 years will feel very similar to owning them outright.
In Perth you typically have the option, especially with pastoral leases, of converting the lease to freehold or extending the term of the lease.
So the payment of an amount for a long term lease is capital in nature and not a tax deduction.
Commercial property
A commercial property is a property that is being rented to somebody other than a tenant for residential use.
The significant difference with commercial property is that the rental income generated by the property is subject to GST. The GST turnover threshold only applies once the “aggregated turnover” of the landlord exceeds $75,000.
It is important to note that the turnover is aggregated. So owning a series of small properties, that are leased to micro businesses, in one persons name can become a problem.
John owns 12 small 35sqm storage sheds that he leases out for $6k each a year plus GST so the total cost is $6,600.
Each person using the sheds does so personally and cannot claim GST.
If John had the sheds held in two different tax entities he could potentially have avoided the need to charge GST on the storage sheds.
Further, commercial property has the potential to be sold free of tax if the owner of the property qualifies for the “small business capital gains tax concessions”.
Managed funds and exchange traded funds
Some types of property are too large for a single family to own. In Perth you will not find too many families looking to buy say, Karrinyup Shopping Centre or QV1.
Large property portfolio’s are often purchased through managed funds, exchange traded funds or a listed investment company. In this instance you are enjoying the underlying property like returns however the tax impact is more akin to a financial product.
The investor in these financial products will often receive a summary by the originator of the investment product. This is typically done to reduce complexity for an army of investors.
What is important for an investor into these type of investment products is that they record their purchase price they paid for their property investment. Further, the tax purchase price of investment product can be reduced if the investment product produces a return of capital or if it generates tax free income to the investor.
Over time these small and gradual returns of capital can make a significant reduction in the tax history of these property investments.
Residential property
The tax outcome of residential property varies significantly. And the two most significant tax outcomes for a residential property investor (compared to other types of property investment) both come down to the GST impact.
A purchase of residential investment property is “input taxed”. This means that the purchaser cannot claim GST on the purchase of property from the vendor even if it is charged. Further, a landlord will never charge GST on the rental income from a residential investment property.
Of course there are more issues at play here.
The primary takeaway here is that “dirt” is simple but the different forms of “dirt” and the legal ownership is varied. And that variation will significantly impact and change the tax outcome of property investment. Any family business, or business family, who is contemplating a large property investment needs to model the tax outcome, and undertake tax due diligence on the property purchase.
