When choosing how to hold your investments, the tax implications can significantly impact your overall return. Below, we outline the key differences between holding investments in your personal name, through a trust, a company, or superannuation.
1. Investing in Your Personal Name
Investing in your personal name is the simplest and most direct option. The tax implications include:
- Tax Rates: Investment income is taxed at your marginal tax rate, which can range from 0% to 47% (including the Medicare levy) in Australia, depending on your income bracket.
- Capital Gains Tax (CGT): If you hold the asset for more than 12 months, you may be eligible for a 50% CGT discount, reducing your taxable capital gain.
- Deductions: Expenses incurred in earning investment income, such as interest on loans (if geared), are deductible at your marginal tax rate.
This option is generally less tax-efficient for high-income earners due to higher marginal tax rates.
2. Investing Through a Trust
A trust can provide flexibility and potential tax benefits but comes with administrative responsibilities.
- Tax Rates: Trusts themselves do not pay tax. Instead, income is distributed to beneficiaries, who are taxed at their marginal rates. This allows for income-splitting, potentially reducing the overall tax burden.
- CGT: Beneficiaries may be eligible for the 50% CGT discount if the trust holds the asset for more than 12 months.
- Flexibility: Trustees can distribute income to beneficiaries in lower tax brackets, making trusts an effective tool for tax minimisation and estate planning.
- Costs: Trusts can be expensive to set up and administer, so the benefits should be weighed against these costs.
3. Investing Through a Company
A company structure is suitable for retaining income within the business but offers limited tax efficiency for distributing income to individuals.
- Tax Rates: Companies pay a flat tax rate of 25% or 30%, depending on their size and whether they qualify as a base rate entity. This is lower than the highest personal marginal tax rate but does not benefit from the CGT discount.
- CGT: Companies are not eligible for the 50% CGT discount, meaning the full capital gain is taxed at the corporate rate.
- Dividend Imputation: When distributing profits to shareholders, dividends are taxed at the recipient’s marginal rate, with a credit for the tax already paid by the company (franking credits).
- Retaining Profits: A company can retain profits to reinvest without immediate tax implications for shareholders, making it ideal for growth-oriented investments.
4. Investing Through Superannuation
Superannuation is a tax-advantaged vehicle designed to encourage long-term savings for retirement.
- Tax Rates: Investment income is taxed at a concessional rate of 15%, while capital gains are taxed at 10% if the asset is held for more than 12 months.
- Contributions: Contributions to superannuation are subject to limits and can attract additional taxes if exceeded.
- CGT: The concessional CGT rate is significantly lower than in other structures, providing a substantial benefit for long-term investors.
- Access: Funds in superannuation are preserved until a condition of release is met (e.g., retirement or reaching preservation age). This limited accessibility can be a drawback for some investors.
Superannuation is an effective structure for reducing taxes on investment income and capital gains, particularly for long-term wealth accumulation. However, pending the length of time before you will likely be able to access your superannuation, the preservation rules may prove unfavorable for the investment decision.
Conclusion
Each investment structure has its own tax advantages and disadvantages, depending on your financial situation and goals. While personal ownership may be the simplest, trusts and companies offer flexibility and additional tax management strategies, and superannuation provides significant tax concessions for retirement savings.
Choosing the right structure requires careful consideration of your current tax position, investment objectives, and future plans. Always consult a qualified financial advisor or tax professional to determine the most suitable structure for your needs.
