Transcript
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Introduces the end of the CGT discount and the key question of whether to buy an investment property in a personal name or a company. The speaker outlines the plan to compare both structures for different buyer types.
By now, you've heard the 50% CGT discount is on its way out.And you've probably seen every man and his dog, including myself, make a video about it.So, I'm not going to bore you with all the details again.But what I want to talk to you about is the question nobody seems to be answering.If you're buying an investment property from here, do you put it in your own name or do you put it in a company?Because for years, a lot of accountants have said the same thing.buy in your personal name or a trust because that's how you get the CGT discount.And for years, I've been the annoying accountant in the room going, "Have you thought about a company?"Well, the discount's gone now.So, let's see who's right now.So, in this video, I'm going to run the numbers for two different people, a couple on the top tax rate and a business owner, and show you which structure comes out ahead.
And spoiler, it's not as simple as I thought it would be.Let's dive right in.
Explains how the former CGT discount worked and how indexation now changes the tax treatment for individuals. It then contrasts that with the flat 30% company tax rate and sets up the comparison.
So, first things first, let's go back to how it used to work.Under the old rules, if you held a property for more than 12 months and then sold it, you only pay tax on half of the profit.So, if you were on the top tax rate of 47%, you were basically paying 23.5% on your capital gain.That's why accountants love buying in your personal name or a trust.Now, indexation works differently.Basically, the government takes what you paid for the property and increases it by inflation every single year that you own it.So, let's say you buy a property for $800,000 and inflation runs at about 3% per year.After 10 years, the government treats your purchase price as roughly $1,75,000 instead of 800K.And you only pay tax on the profit above that number.The catch is the tax rate.You pay your normal tax rate on that profit and it can never go below 30%.
So if you're on the top tax rate, you're paying 47% on whatever you made above that inflation.A company is a lot simpler.It never got the 50% discount in the first place and it doesn't get indexation either.So nothing has changed for a company.It just pays a flat 30% on the whole profit and the money stays in the company.So on one side you've got indexation where you get the inflation adjustment but you're paying up to 47%.And on the other side you've got the company where there's no adjustment but you're locked in at 30%.The question is which one's better?And that's what I want to show you today.
Runs the first example for a high-income couple buying in their own names versus a company. It shows how property growth rates and dividend planning can shift the outcome over time.
Okay.So let's start with the first example.Let's say you're a husband or a wife or a husband and a husband or a wife and a wife.You're both earning good income personally.you're both on 47% tax rate and you want to buy an 800k investment property.Do you buy it in your own name or do you buy it in a company?Now, to keep this simple, I'm only looking at the tax you pay when you sell.I've assumed inflation at 3% a year and I've assumed the property grows at 6% a year, which is roughly what the Australian property has done over the long run.So if you sell after 10 years, the property is worth about 1.43 million.And if it's in your own names, you'll pay about $168,000 in taxes.If it's in the company, you would pay about $190,000.So your own name comes out ahead.
And if you've hold it for 20 years, the gap closes right up and it's pretty much a tie.Now, this video is about indexation versus 30% company tax rate.So, we've focused predominantly on the tax on the profit of the sale.However, we've not taken in consideration the net rental income per year that would be taxed at 47% most likely versus 30% company tax and land tax issues when buying your property in your personal name.So, here's where it's interesting.What surprised me is that how fast the property grows compared to inflation matters a lot more than how long you hold it.If that same property grows at 8% instead of 6%, that company starts winning from about year three.By year 10, the company's ahead by $28,000.And by year 15, it's ahead by $86,000.And if it only grows at 4% a year, your own names win easily by about $64,000 after 10 years.
The reason being is because the indexation only takes out the inflation part.So the faster the property grows, the bigger the profit above inflation.And the more of it, you're paying 47% tax on it.Whereas the company is sitting at 30% no matter what.Now, there's a catch and a disclaimer with the company.30% only applies while the money stays inside the company.The moment you pull it out and pay it to yourself, you could be paying top up tax on your marginal tax rates.That is why I advise my clients on staggering your dividends every single year so you minimize the topup tax.For example, a couple takes $90,000 each of fully franked dividends.they receive the franking credits that will cover the income taxes and you pay no top up tax at all if they don't earn any other income elsewhere.But if you take too much in one go with franking credits, you can basically end up with 47% tax on the whole profit that you generate in that 10year example.
That would be $297,000 in taxes.So, a company only works if you're planning to leave the money in there and keep investing it and stagger your dividends annually.That's how I set up my own structure, but I always say to clients, it's not for everyone.
Compares using company profits to buy property personally versus through a company structure. The example shows how avoiding large top-up tax can make the company option much more attractive for business owners.
Now, the second example is where it really gets different, and this is the one I think a lot of business owners need to hear.So, let's say you run a business through a company and you've got profits sitting in there that have already been taxed at 25%.And you want to use, say, $160,000 of that money as a deposit on that same property for 800K.If you want to buy that property in your own name, you've got to get the money out of the company first.And to do that, you pay yourself a dividend and you've got to pay a top up tax from that 25% to most likely your personal tax rate of 47%.So to end up with 160K in your pocket, you need to pay yourself about $226,000 and that's about $66,000 in taxes and you haven't even bought the property yet.
But if you buy it in the company instead, the money moves from your business into a bucket company or holding company and the top up tax is most likely from 25 to 30%.So to get $160k across, you only need to move about $171,000.That's about $11,000 in taxes.So before you even sign the contract, the company's already out ahead $55,000.Then if you hold the property for say 10 years at 6% growth and you sell it, it's the same as before.About $168,000 in taxes in your own name and about 190k in the company.But when you add everything up, buying in your own name has cost you about $234,000 in taxes and the company has cost you about $21,000.So the company wins by about $33,000.And honestly, that's before I even counted the rent.If the property is making a profit while you hold it, that profit gets taxed at 47%.
In your own name, but 30% in the company, and your loan repayments are coming out of the money that's being taxed at 30% instead of 47%.So, the gap only gets bigger.This is why I'm such a big fan of bucket companies or holding companies for business owners.If the money is already sitting in the company, it usually makes sense to keep it there for investment.
Summarizes the main factors that determine the best structure, including growth expectations, funding source, rental income, and land tax. The speaker closes with practical advice, a disclaimer, and a note about trusts and further resources.
So, I know that's a lot of numbers, which I love, but bringing it back, there are a few things that decide which way you should go.The biggest one is how fast you think the property is going to grow compared to inflation.If it's a high growth property, the company starts to look a lot better.If it's a slow and steady and your own name tends to come out ahead, then yeah, personal.The second one is where the money is coming from.If you're buying with your salary, your own name has a better shot.But if the money is already sitting in the company, the company usually wins because you're not paying that big top up tax to get it out.The third one is whether you're going to need the money personally.If you're going to pull that money out down the track or always, the company gets really expensive for you.
And then there's that rent side of it and your investment goals.If you buy an established property now, you can't negative gear it against your other income anymore, that only works for new builds since the budget.And if a property makes a loss inside that company, that loss stays stuck in that company.Can't use it against your salary.So, you've got to think about whether the property is going to make money or lose money while you hold it.Are you aiming for rental profits or the growth in value?There's other things, too, like land tax, which I always call the forgotten tax.So, there's no single answer that works for everyone with land tax.So, what would I do?First, I run the numbers before you buy it because once a property is in a structure, it's very expensive to move it out.You usually paying stamp duty and CGT all over again.
Second, if you're a business owner and the profits are already sitting in a company, I'll be looking very seriously at a bucket or holding company.In most of the scenarios I ran, it came out ahead.And third, if you already own property, please don't panic and sell before the 30th of June 2027.Any growth up to that date still gets the 50% discount.You just don't pay tax until you sell it.Quick disclaimer, all this information is just general information, not personal or tax advice.Everyone's situation is different.So, make sure you speak to an accounter before you decide which structure to buy in.So, personal name or company, it really comes down to how fast the property grows, where the money is coming from, your investment goals, and whether you need to pull that money out.But for a lot of business owners, the company still comes out ahead even with the new rules.
If you want me or my team to run the numbers for your situation, you can book a call with us at Box Advisory Services.The links in the description.And if you got a family trust, the government is also bringing in a 30% minimum tax on trusts.And I've done a whole video on what that means for you.You can watch it here.See you in the next one.