When it comes to investing, one of the most important decisions you’ll make is the structure in which you hold your investments. The right structure can help you maximise tax benefits, protect your assets, and provide flexibility in accessing your investments. On the other hand, the wrong structure could lead to higher taxes, less protection, and reduced control over your financial future. In this blog post, we’ll explore the four common investment structures: personally held investments, trusts, companies, and superannuation. We’ll break down the pros and cons of each structure in terms of tax, simplicity, asset protection, and accessibility, helping you make an informed decision about how to structure your investments.
Personally Held Investments
Holding investments in your personal name is one of the simplest and most common ways to invest. This structure involves directly owning assets, such as shares, property, or managed funds, as an individual.
Pros:
- Simplicity: Personal ownership is straightforward, with no need for complex legal structures. You manage your investments directly, and reporting for tax purposes is relatively simple. Holding assets in your personal name also removes the need for accounting costs on using another entity structure.
- Accessibility: You have full control and access to your investments at any time. There are no restrictions on when you can sell or use the proceeds from your assets.
- Capital Gains Tax (CGT) Discount: Individuals are entitled to a 50% CGT discount on assets held for longer than 12 months. This means only half of the capital gain is taxed at your marginal income tax rate when you sell an asset.
Cons:
- Tax: Income and capital gains from personally held investments are taxed at your personal marginal tax rate, which can be as high as 45% for high-income earners. This can result in significant tax liabilities.
- Limited Asset Protection: Assets held in your personal name can be exposed to creditors or legal claims. If you’re involved in a business or high-risk profession, personally held investments are vulnerable in the event of bankruptcy or litigation.
Trusts
A trust is a legal structure in which one party (the trustee) holds assets on behalf of another party (the beneficiaries). Trusts are commonly used in family or estate planning and offer flexibility in distributing income.
Pros:
- Tax Flexibility: One of the key benefits of trusts is the ability to distribute income to beneficiaries in lower tax brackets, reducing the overall tax liability for the trust. Beneficiaries pay tax at their personal marginal tax rate, which can result in significant tax savings.
- Asset Protection: Trusts provide a layer of protection for assets, as they are held by the trustee and not directly owned by the beneficiaries. This can shield assets from creditors or legal claims against beneficiaries.
- Estate Planning: Trusts can be an effective tool for estate planning, as they allow you to pass on control of the estate by nominating the following appointor of the trust who has ultimate control of the trust.
Cons:
- Complexity: Setting up and managing a trust involves legal and administrative complexity. You’ll need to appoint a trustee, establish a trust deed, and manage ongoing compliance requirements, such as preparing trust tax returns.
- Tax on Undistributed Income: If income is not distributed to beneficiaries, it is taxed at the highest marginal tax rate (45%). Therefore, income distribution must be carefully managed to avoid unnecessary tax liabilities.
- Costs: There are setup and ongoing management costs associated with a trust, including legal fees and accountant costs for maintaining compliance.
Companies
A company is a separate legal entity that can own assets and conduct business. It offers distinct advantages in terms of taxation and asset protection, but it is not typically used solely for personal investment purposes.
Pros:
- Lower Tax Rate: Companies are subject to a fixed tax rate of 30% (or 25% for base rate entities). This can be lower than the marginal tax rates for high-income individuals. Additionally, any tax paid is potentially able to be reclaimed in the future through the franking credit system.
- Asset Protection: A company provides a high level of asset protection, as the company is a separate legal entity. This means creditors can only pursue company assets in the event of legal claims, protecting your personal assets.
- Retained Earnings: Companies offer flexibility in managing profits and reinvesting earnings. You can choose to retain profits within the company to grow the business or distribute them to shareholders as dividends.
Cons:
- No CGT Discount: Companies are not entitled to CGT discounts that individuals and trusts can access. This can result in higher taxes on capital gains compared to other structures.
- Complexity and Costs: Setting up and maintaining a company involves ongoing regulatory and compliance obligations, including annual financial statements, tax returns, and fees. This adds a layer of complexity and cost compared to simpler structures.
Superannuation
Superannuation is a tax-effective retirement savings vehicle in Australia. Investments held within superannuation can benefit from favourable tax treatment, but access to funds is restricted until certain conditions, such as retirement, are met.
Pros:
- Tax Benefits: Superannuation is highly tax-effective. Contributions to super (concessional contributions) are taxed at 15%, and investment earnings within the fund are also taxed at 15% during the accumulation phase. In the pension phase, the tax on investment earnings drops to 0%.
- CGT Discount: Super funds benefit from a 33.33% CGT discount on capital gains for assets held for more than 12 months.
- Asset Protection: Assets held within superannuation are protected from creditors, providing peace of mind for individuals concerned about the risk of bankruptcy or legal claims.
Cons:
- Access Restrictions: The biggest downside to superannuation is the lack of accessibility. You generally can’t access your super until you meet a condition of release, such as retirement. This lack of liquidity makes super unsuitable for individuals wishing to use the proceeds from an investment if they do not yet have access to their superannuation.
- Contribution Limits: There are strict limits on how much you can contribute to super each year. Concessional contributions are capped at $30,000 per year, and non-concessional contributions are capped at $120,000 per year (or up to $360,000 over three years using the bring-forward rule).
- Complex Rules: Superannuation is subject to complex regulations, including contribution caps, conditions of release, and rules around withdrawals. This can make it difficult to navigate without professional advice.
Choosing the Right Structure: A Balanced Approach
Selecting the right structure for your investments will depend on a variety of factors, including your tax situation, asset protection needs, investment goals, and the level of complexity you’re willing to manage. Many investors use a combination of structures to balance the advantages and disadvantages. For example, you might hold some investments personally for simplicity, use a trust for tax and estate planning benefits, and contribute to superannuation for long-term tax savings and retirement security.
Final Thoughts
Choosing the right structure for your investments is essential for minimising tax, protecting your assets, and ensuring flexibility in accessing your funds. Each structure offers distinct advantages and disadvantages, so it’s important to assess your financial goals and seek advice from a financial advisor to determine the best approach for your circumstances.
If you’re unsure which structure is right for you or want to review your current investment strategy, contact our team of Financial Advisors. We’ll help you optimise your investment structure and build a plan that supports your financial goals now and into the future.
