Once you have decided to make an investment it is important to consider what is the best way to structure the ownership. Should it be held in individual or joint names, held in a partnership, company, trust or super? Having an appropriate ownership structure can have a large impact on future taxation, tax deductibility, access to benefits, protection from creditors and distribution flexibility.
An investment structure refers to who legally owns the investment. The different types of structures include:
Superannuation- (which is a type of trust)
When considering what is the best structure to use, you should consider:
When will you need access to the investment, including any income and capital gain the investment generates?
What are the tax consequences of each structure?
Do you need to protect these assets from future creditors?
There is not one ‘best’ investment structure because each investment is different. Please consider the advantages ad disadvantages of each structure:
Individuals (and joint ownership)
This is the simplest investment structure, where you hold the investment in your personal name. They are easy to establish and can be simple to manage. Any income and realised capital gains are tax at your marginal tax rate. For assets which you have held for over 12 months you receive a 50% tax discount on any realised capital gain. They are less expensive to run and have minimal set up costs.
Disadvantages of individual ownership include no flexibility of how to distribute income and capital gains, and minimal asset protection against creditors.
A partnership is a separate legal entity and requires a tax file number. They are relatively easy to establish with low costs. The partnership must distribute any income as per the partnership agreement which provides limited flexibility. The distributed income is then taxed at the partners individual tax rate.
Members of a partnership are not protected against creditors.
Cost of setting up a company can be high, and you must complete a tax return and accounts each year. The benefits of a company structure are that the base tax rate is 30% (reducing to 25% for certain companies) and they offer some protection for shareholders against being sued.
A company is not entitled to any capital gains tax discounts (unlike individuals) and can only offset losses against future income for the company.
A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration. Therefore, trusts are required to be registered in the tax system, lodge tax returns and pay some tax liabilities.
Beneficiaries (except some minors and non-residents) include their share of the trust's net income as income in their own tax returns.
There are different types of trusts including family, fixed, testamentary, and superannuation trusts. Each offer different benefits which may include flexibility of income and capital gain distribution to different beneficiaries. This can provide flexibility to distribute income and capital gains to individuals on lower taxable incomes and reduce your overall tax liability.
A super fund is a specific type of trust where the trustee holds property typically for the benefit of the members retirement.
Superannuation is designed to build wealth for your retirement and the government has imposed strict rules on how they are managed. These include how and how much you can contribute, and how benefits can be accessed.
Superannuation has a low tax environment with pre-tax contributions being taxed as low as 15% and for post-tax contributions no tax is paid on the contribution. Investment earnings are tax at a maximum of 15% and realised capital gains taxed at 10% if held for over 12 months.
You generally cannot access super until after you reach preservation age (which is moving to age 60) and these funds can be accessed as either a lump sum or regular income stream generally tax-free after age 60.
Due to the benefits and disadvantages of different ownership structures it is important to consider what the best suits your personal circumstances, goals and objectives and investment time horizon.