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THE IMPLICATIONS OF PROPERTY OWNERSHIP

The enjoyment, control, protection and bequeathing of personal assets and investments are all affected by the manner in which those assets are owned.

 

Ownership can be classified into a number of different categories.

 

Individual Personal Ownership

 

The advantages of individual personal ownership include full control and enjoyment; no obligations or responsibilities to others; disposable by Will; and no extra costs.

 

The disadvantages are that the property may be available to creditors on bankruptcy; may be included in asset testing; may have tax disadvantages; may be challenged if disposed of by Will; and may be viewed as “relationship property” under the revamped Property (Relationships) Act 1976 which comes into force 1 February 2002. The Act was previously called the Matrimonial Property Act 1976, and has been amended and renamed.

 

(Relationship property typically includes the family home, family chattels, common or jointly owned property, and income earned or assets acquired after the marriage or relationship began.)

 

Joint Ownership

 

Joint ownership has the advantage of joint control and enjoyment; any obligations are to the joint owners only; and there are no extra costs.

 

On the downside, the joint owner’s share may be available to creditors; the property may be included in asset testing; there are potential tax disadvantages; and the property cannot be left by Will because ownership passes automatically to the survivor. Also, the property may be viewed as “relationship property” described above.

 

Ownership in Common

 

Ownership in common has the same advantages and disadvantages as for joint ownership except that that on death, the share in the asset passes according to will or intestacy law. Ownership in common can also be included when determining “relationship property”.

 

Ownership by a Company

 

Company ownership has the advantages of limited liability of a trading entity; company tax rate of 33c; transferability of tax losses to shareholders (LAQC); and is generally considered to be the best structure where there are two or more non-related owners.

 

The primary disadvantages of company ownership are the administration costs involved.

 

Trust Created by Will – Life Interests

 

Couples may draw up their Wills so as to leave their respective shares in their combined assets for:

 

(a)        Income generation in favour of the survivor until death or establishment of another relationship.

 

            The property then passes to:

 

(b)        Their children or other nominated persons.

 

Using this type of structural ownership has the advantage of protecting the deceased’s share of the combined matrimonial assets against loss through anew relationship or profligacy by the survivor. In respect of the deceased’s share, it also provides protection against asset testing.

 

Negatives include the set up and administration costs; some loss of control for the survivor resultant from the need to have an independent trustee(s); and the lack of flexibility if the survivor is entitled to enjoy only the income (but the Will may empower trustees to resort to capital in special circumstances).

 

Discretionary Family Trust

 

The discretionary family trust has a number of advantages including protection from creditors and bankruptcy; exclusion for asset testing purposes; flexibility for tax purposes by providing a choice of beneficiary and/or capital distributions; and flexibility for altered personal and family circumstances if the Trust Deed is able to be altered.

 

Discretionary family trusts are not subject to challenge by family members as a Will can be. They also provide a protection against the re-marriage or profligacy of the surviving spouse or partner.  In certain circumstances such trusts are not considered to be “relationship property”.

 

The disadvantages of discretionary family trusts are the perceived loss of control by some donors; the costs of establishment, administration and gifting; and the proper management and record keeping required of trustees.  Trustees have a special duty to exercise the care, diligence and skill that a prudent person of business would exercise when managing the affairs of others.