Choosing a Tax Structure for your Property Development

Which Entity is right for you?

This handy table shows the features and benefits of different accounting entities / structures and how they will impact your next property development, from asset protection, tax minimisation and income streaming options of each entity type

 Sole TraderGeneral Law Partnership (Business)Tax Law Partnership (Joint Assets)CompanyUnit TrustDiscretionary Trust
Established byN/APartnership agreementAsset titleConstitutionTrust deedTrust deed
Establishment and operating costsLowMediumAs per assetHighHighHigh
Perpetual existenceTerminates on deathTerminates on change of partnersTerminates on disposal of assetYes, until wound up by members or creditorsMust vest within certain periodMust vest within certain period
Limited liabilityNoNoNoYesYes, if corporate trusteeYes, if corporate trustee
Controlled byIndividualsPartnersPartnersDirectors – Day to day management
Shareholders - Ultimate decision making
Trustee – Day to day management
Appointor (Often unit holders) - power to appoint / dismiss Trustee
Trustee – Day to day management
Appointor (Often unit holders) - power to appoint / dismiss Trustee
Flexibility for new equity holdersNoYes, special tax rules apply to admission or retirement of partnersYes, but requires legal transfer of titleYes
Care needed if incorporated pre-CGT (1984)
YesYes
Care needed in definition of "Family Group" especially if family trust election
Does principal have fixed interestYesYesYesYesYes in broad terms Tax definition of "Fixed Trust" requires units to be issued or redeemed at market valueNo
Method of distribution to equity holdersWholly to sole traderDistribution in proportion to partnership share
Partners salary if allowed in partnership agreement
Distribution in proportion to ownership of assetDividends according to shareholding
Flexibility via different share classes, can emulate discretionary trust
Trust distribution in accordance with unit holding
Proportionate approach were tax and accounting profit differ
Trust distribution in accordance with trustee resolution
Proportionate approach where tax and accounting profit differ
Ability of principal (or associate) to withdraw moneyAs drawingsAs partner drawingsAs partner drawingsMay be unable to frank dividends until tax paid on profits and franking credits available
Loans may be deemed dividends under Division 7A
As paid or applied by trustee
Trust deed and tax law have special provisions for unpaid present entitlements
As paid or applied by trustee
Trust deed and tax law have special provisions for unpaid present entitlements
Asset protectionLegal structure provides no protection, can be managed with insuranceLegal structure provides no protection, can be managed with insuranceLegal structure provides no protection, can be managed with insuranceYes, subject to personal liability of directorsYes, if appointor is the unit holdersYes, if joint appointors include and independent person, otherwise bankruptcy trustee may seek to exercise power of appointment
Issues for familiesN/ANot suitable for children under 18Family members are given independent property rightsPersonal liability of directors
Principal can give income & assets to family and retain control by issuing voting shares
Family members are given property rights via trust deed
Principal can exercise limited control as trustee
Principal can give income & assets to family and retain control as trustee and appointor
Issues for unrelated partiesN/AJoint and several liabilityPartners retain independent property rightsNo joint and several liability
Established legal rights for shareholders
Unit holders retain independent property rights via trust deedGenerally not suitable due to power of trustee and appointor
Tax rateIndividual marginal rates
Average rate (including Medicare) is lower than company rate below $142,000 (2010/11)
Partners’ marginal ratesPartners’ marginal ratesCompany rate (30%)
Allows deferral of tax on income in excess of $80,000 (2010/11) by delaying dividends until low income year
Beneficiaries’ marginal rates (or top marginal rate if retained in trust)Beneficiaries’ marginal rates (or top marginal rate if retained in trust)
Basis of accounting for tax purposesAccording to type of business
Former STS taxpayers can use cash
According to type of business
Former STS taxpayers can use cash
According to type of asset, usually cashAccruals
Former STS taxpayers can use cash
Accruals
Former STS taxpayers can use cash
Accruals
Former STS taxpayers can use cash
Streaming of IncomeNoNoNoUnequal dividends via different classes or shares, but not unequal franking percentage
Can't stream different classes of income
Possibly unequal distributions via different classes of units.
Streaming different classes of income unresolved (Bamford case)
Unequal distributions possible via trustee discretion
Streaming different classes of income unresolved (Bamford case)
Distribution of lossesIndividual can usePartners can usePartners can useRemain in company, must meet tests to recoup (except PSI)Remain in trust, must meet tests to recoup (except PSI)Remain in trust, must meet tests to recoup (except PSI)
Transfer of lossesNoNoNoYes, if part of consoldidated groupNoNo
PAYG instalment arrangementsPaid by individualPaid by individualPaid by individualPaid by companyOnly paid if income retained in trustOnly paid if income retained in trust
Employment of principalNoNoNoYesYesYes
Remuneration for associatesYes, limited by s26-35 and PSI rulesYes, limited by s26-35 and PSI rulesNoYes, limited by s109 and PSI rulesYes, limited by PSI and general anti-avoidanceYes, limited by PSI and general anti-avoidance
FBT applicable to benefits provided to principalNoNoNoYesYesYes
Superannuation contributionsSelf employedSelf employedN/AEmployer sponsored
Possible maximum contributions for family employees (Ryan case)
Employer sponsoredEmployer sponsored
50% CGT discountYesCGT applies to individual partners not to partnershipYes if asset held for more than 12 monthsNo
Generally not suitable for Real Estate or passive investments expected to increase in value
Yes, but the benefit is limited by CGT Event E4Yes
Small business CGT concessionsYesCGT applies to individual partners not to partnershipCGT applies to individual partners not to partnershipYes
Significant individual tests and other conditions apply
Yes
Significant individual tests and other conditions apply
Yes
Significant individual tests and other conditions apply
Tax concessions availableAll primary production
Small business trading stock, repayments & depreciation
Entrepreneurs' tax offset
All primary production (some at partner level)
Small business trading stock, repayments & depreciation
Entrepreneurs' tax offset
N/ASome primary production (no averaging or farm management deposits)
Small business trading stock, repayments & depreciation
Entrepreneurs' tax offset
Some concessions "Lost" because untaxed book profits become unfranked dividends.
Some primary production (no averaging or farm management deposits)
Small business trading stock, repayments & depreciation
Entrepreneurs' tax offset
Some primary production (no averaging or farm management deposits)
Small business trading stock, repayments & depreciation
Entrepreneurs' tax offset
Non-commercial losses rules applyYesYes, to individual partnersNo, generally not business incomeNoNoNo
Personal services income rulesLimited deductions
Personal services entity loss is deductible to the individual
Limited deductions and attribution to individuals
Personal services entity loss is deductible to the individual
N/ALimited deductions and attribution to individuals
Personal services entity loss is deductible to the individual
Limited deductions and attribution to individuals
Personal services entity loss is deductible to the individual
Limited deductions and attribution to individuals
Personal services entity loss is deductible to the individual
Specific anti-avoidance provisionsUnearned income of minors
Uncontrolled partnership income
Sham partnership agreements
Unearned income of minorsDivision 7A
Debt & equity rules
Value shifting rules
Unearned income of minors
Trust loss rules
Unearned income of minors
Trust loss rules