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The Investor’s Guide to Buying Property

In whose name do you buy your next property?

Question: Do you buy investment property in a personal name, or use a property investment structure such as a company, a family trust or a self-managed super fund?

Answer: Choose the one that suits your needs best: to be simple, safe, tax effective and inter-generational.

This newsletter looks at the pros and cons of buying property in a personal name, a family trust and a super fund for investment.

This is a general guide. Because everyone’s circumstances are different, professional advice should be obtained before acting. Cordato Partners Property Lawyers provides that advice.


Buying the family home in a personal name is attractive ... because

  • Simplicity – any person over 18 may buy property in their personal name.
  • Easy to finance – with a genuine savings record for at least 5% (often 10%) of the price, 24 months full time employment and a clean credit record, a person can borrow up to 95% (or 90%) of the price as a loan repayable over 30 years.
  • No capital gains tax is payable on the sale of the family home so long as it is the main residence for the owner.
  • No land tax is payable on the family home. Pensioner concessions or rebates are available for council rates and water rates.
  • First Home Owner Grants and stamp duty exemptions are sometimes available.
  • Easy inheritance – the family home passes to the surviving spouse, then to the beneficiaries without death duties or stamp duty being payable.

Buying investment property in a personal name is attractive ... because

  • Negative gearing - the investor can offset the loss from the negative geared property against their personal income, and so reduce their personal tax.
  • Loans – A lending ratio of up to 90% of the purchase price is available to investors who buy in their personal name. Note: This only applies to investors on a salary (PAYG) and for a small number of properties. Otherwise, a lending ratio of 80% applies.
  • Transfer taxes - If the property is already in a personal name, it is best to not transfer it to a structure because stamp duty is payable and capital gains tax might also be payable.

But there is little asset protection for properties in personal names

These are some suggestions to limit asset exposure for properties in personal names -

  • Ownership - either buy the family home in the spouse’s/partner’s name, or buy jointly with a the person with most exposure taking a token 1/100th share in the family home.
  • Insurance – homeowner insurance covers not only the risks of storm and tempest and fire, but also covers the risk of injury sustained on the property by visitors who might slip on a path, trip on a stair or walk into a glass door.
  • Avoiding cross-collateralisation – a home owner might decide to buy an investment property. The lender might offer one loan with security over both the family home as well as the investment property – this is cross-collateralisation. To avoid exposing the family home to loss on the investment property, take out two separate loans – one for each property.
  • Neutralising the equity –The equity in a family home will be a target in litigation. Some financial advisers recommend that a second mortgage be registered to ‘neutralise’ the equity. This will work if it is a genuine loan. But often, this ‘protection’ fails because the loan for which the second mortgage is registered is not a genuine loan.


Business owners, professionals, builders and traders are particularly exposed to litigation personally because they sign personal guarantees, incur business debts and suffer partnership break ups. Sometimes, the financial exposure is so great that bankruptcy results and personal assets are lost.

Asset protection is the number one reason why lawyers and accountants recommend that investors set up property investment structures for buying investment property. That way, if anything goes wrong, the damage is limited to the structure and the personal assets are protected.

How do companies and trusts provide asset protection for investors?

This is how companies and trusts work to keep investor assets safe -

  • Companies - it’s been said that the introduction of the limited liability company in the UK Companies Act of 1862 was the greatest single breakthrough for commerce in modern times. Why? Because a company provides a limited liability protection for its owners (the shareholders). That is why the words Pty Ltd (Proprietary Limited) are used in the name.

    A company is a stand-alone legal entity.
    A company may trade in its own right, or act as a trustee company for a trust or as an investment company or as a nominee company. Even though a company may go into liquidation, receivership or administration, none of these events expose the shareholders to personal liability.
  • Trust Structures – the English Law also developed the law of trusts. A trust is a legal relationship where the trustee administers trust assets for the benefit of beneficiaries of the trust. The trust assets are often money, which is given to a trustee.

    Illustration: in 1711, in Brown versus Litton, the Court of Chancery distinguished a trust from a loan. The facts were that a ship’s captain (Litton) was entrusted with 800 dollars on a voyage. The captain used the money to trade, and greatly increased it. At the end of the voyage, the captain offered to pay back the 800 dollars with interest, as if it were a loan. But the Court ordered the captain to pay back all of the money, less a ‘proper salary’ for his pains and trouble, because the Court said that Litton held the money in trust for Brown. This trust was a bare trust because the trust assets were returnable on demand.

Why are trusts the favourite legal structure for property investors?

Most of the 660,000 trusts in Australia are family trusts (also known as discretionary trusts). There are almost 500,000 Self-Managed Superannuation Funds (SMSFs) which are also trusts.

Serious property investors favour family trusts and SMSFs for property investment because -

Asset Protection

In a family trust, the trustee company buys the property and borrows finance in the trust name. If the family trust is caught up in litigation concerning the property, it is the trustee company is sued, not the family members. In most cases, property insurance will shield the trust assets from outside claims.

In a family trust, a creditor pursuing a family member for a debt cannot lay claim to the trust assets. The trust assets are shielded from creditors for the legal reason that none of the family members has any ownership rights in the trust assets in a discretionary trust.

In an SMSF, a member has a retirement fund in their name, which they cannot access until they retire. SMSFs provide complete asset protection because a member’s fund is not available to their creditors by law if they (the member) becomes bankrupt – see section 116(2)(d)(iii)(A) of the Bankruptcy Act 1966. This does not protect extraordinary contributions which made to put assets out of reach when bankruptcy is on the horizon.

Tax Effectiveness

Family trusts are tax effective investment vehicles because profits can be split in different ways each year. The trustee decides how the profits are distributed at the end of each year.
Profits can be streamed to ‘smooth’ the taxable income of the family: to a low income family member, rather than to a high income family member, and therefore take advantage of a lower income tax bracket.

As a tax shelter, SMSFs reign supreme. To have an income tax rate of 15 cents in the dollar, a capital gains tax rate of 10 cents in the dollar, and with zero tax in retirement mode, once required a trust to be set up nestled in a clump of palms in a tax haven somewhere in the Caribbean! Now, all that is needed is to set up an SMSF in Australia. As a bonus, contributions of $25,000 per annum per person to the SMSF are tax deductable.

Trusts are best suited for positively geared property, unless there is a cash flow from other sources within the trust to offset the losses, because losses in a trust are not able to be used by the members personally. Trust losses are able to be carried forward to future years.

Estate Planning to preserve wealth for the next generation

In a trust, the control of the trust assets passes to the next generation according to the trust deed, outside of the will.

In a family trust, on death, control passes to the next appointor. The trust assets do not need to be sold or transferred on death, and no death duties or taxes are payable.

In an SMSF, on retirement, the SMSF must pay an annual pension to member. This means that not long into retirement mode, unless there is a pool of cash available, the trust property which is real estate will need to be sold or distributed to the member. Therefore SMSFs are of limited value for inter-generational wealth transfers. On death, if the member’s fund passes according to a binding death benefits nomination, no tax is payable.

Family Trusts are like cruise ships

The captain and the crew run the cruise ship, just like a trustee runs a Family Trust. The passengers enjoy the cruise, just like the beneficiaries profit under the trust. All the passengers are a “family”. In port, the captain allows a tug boat to tow the cruise ship, just like a trust might appoint a nominee company to represent the trust. A new captain and crew might replace the old, just like a new trustee can replace an existing trustee.


Which trust structure is best for you? A family trust or an SMSF?

The best trust structure for you depends on the property, the financing, the tax effectiveness, and personal circumstances. These are some considerations -

Family Trusts (investment trusts / discretionary trusts)

Family trusts excel for tax effectiveness, for preserving wealth and for asset protection.

  • Family Trusts are set up with a Deed of Settlement. This is usually a long document which contains the rules for how the trustee is to manage the trust, particularly the trustee’s powers for investment. A family trust can make loans to, and buy assets for, the family. A family trust can be set up under a will – if so, it is called a testamentary trust.
  • The trust deed will describe the beneficiaries – the family members who may benefit. The trust may be a ‘dynasty trust’ - restricted to bloodline family, or may extend to their spouses and partners. The trustee has the discretion to distribute profits to each family member.
  • Family trusts are not well understood by all lenders, so choosing the right lender is essential. Lenders will lend no more than 80% of the price to a family trust.
  • Family trusts should own real estate indirectly in NSW because direct ownership will mean more land tax liability. Therefore, for land tax in NSW only, a family trust uses a nominee company as the name in which to buy real estate. This nominee company holds the property for the family trust, as a custodian trust (a bare trust) under which the family trust may call for the nominee company to transfer the property to it any time. Nominee companies and custodian trusts are also used by SMSFs when purchasing property with a loan.

SMSFs (retirement trusts)

SMSFs excel for asset protection and tax effectiveness.

  • SMSFs are set up with a Deed of Settlement. The Deed is similar to a family trust deed, but it has the single purpose of providing for the member’s retirement.
  • SMSFs members must wait until they retire to access their funds. When they retire, members must draw a minimum income stream of 4% of their retirement fund annually. Only 4 members are allowed. These rules limit the flexibility of SMSFs for next generation wealth preservation.
  • SMSFs are restricted when it comes to investing. They cannot run a business, cannot buy family homes or holiday homes, and cannot loan more than 5% of their assets to the beneficiaries. Buying and selling investment property occasionally is not running a business.
  • SMSFs use a custodian trust when borrowing to buy property. An SMSF Custodian Trust Deed allows the nominee to own, borrow and mortgage the property. When the loan is paid out, the nominee transfers the property to the SMSF, without stamp duty. Lenders often lend 65%, and no more than 80% of the price to SMSFs.

Conclusion – Buy in personal names for simplicity, buy in a family trust for asset protection and tax flexibility, and buy in an SMSF to set up a tax sheltered cash flow for retirement.

The Investor’s Guide to Buying Property has been produced by Cordato Partners Lawyers, as part of its Property Law practice. We can meet all your conveyancing needs.

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