However, to work, it must suit your individual circumstances without overloading you with administration. The best way to determine your ideal investment structure is to speak to your trusted accountant.
In this article we explain the different investment structures available to you, and how each one works to protect and grow your wealth.
An individual investment structure holds your assets under your name, the name of your spouse, or jointly. This structure is the easiest and cheapest, so is often the first choice for people with only one or two investments - such as first-time property investors.
Buying real estate as an investment is often done under an individual structure.
If you're on a low marginal tax rate, and expect to remain that way, an individual structure may offer you a reasonable tax rate while keeping your assets easily accessible. On top of this, taxes are much easier to manage, as all income and capital gains are included in your personal tax return. Negatively geared assets can be deducted against your income and if you have owned the asset for at least 12 months, 50% of the capital gain is exempt from income tax.
The downsides of an individual structure are that income cannot be distributed strategically to minimise tax and assets are left unprotected. If you find yourself facing financial hardship, your assets can be exposed to creditors.
Trusts are popular with people looking to preserve their family's wealth. They are not legal entities, but relationships controlled by trustees to protect the wealth of their beneficiaries.
A family trust offers greater levels of asset protection, tax efficiency and estate planning benefits than an individual structure. Additionally, assets in a trust are considerably harder for creditors to access. Income from a trust is taxed at the marginal rate of the beneficiaries and can be strategically distributed to reduce tax obligations. The same capital gains discount applies to trusts as to individuals.
Assets will continue to be held by the trust even after the death of the trustee or a beneficiary, which can simplify estate planning.
All of this comes with additional administration, from registering the trust to filing returns and tracking tax liabilities. You must be confident about the legal obligations and benefits of a trust before you hit go.
A family trust can help you protect your wealth and the people you care about most.
Another option is to incorporate a private company to hold business and investment assets.
Company owners can limit their liabilities, meaning they are not personally responsible for business debts. However, personal investments held by a company are exposed to the risks of the business, and thereby its creditors.
Companies are taxed at a flat rate of 30% (27.5% for small businesses) - a potentially tax-effective structure for those on higher marginal rates - but are the only structure not entitled to the capital gains discount available to individuals.
From an estate planning perspective, any assets held by the company remain so after the owner's death, and control of the company can be passed on through the transfer of shares in a Will.
"The best structure for you now won't necessarily be suitable for you in five years time."
SMSFs offer a lot of flexibility and opportunities for tax efficiency. However, they are very strictly monitored by the Australian Taxation Office (ATO) and can only be drawn on when a beneficiary reaches their preservation age and / or retires from employment.
Assets in the accumulation phase are taxed at 15%, while superannuation funds who pay their members a pension are eligible for a tax exemption on their investment earnings. Members who are 60 years of age or more won’t pay tax on this income and the assets invested by the SMSF is protected from creditor claims.
That said, there are costs associated with operating an SMSF. They must be audited annually for compliance and penalties for non-compliance can be significant. A Rice Warner report commissioned by the Australian Securities and Investments Commission (ASIC) suggests that SMSFs with a balance below $200,000 may only be competitive compared to industry or retail funds if the trustees take on some of the administration themselves.
The best structure for you now won't necessarily be suitable for you in five years' time. As circumstances change, so does your wealth protection requirements and financial goals.
Speak to the team at VBA today to ensure you have the right investment structure to protect and grow your wealth.