Getting your investment ownership structure wrong can be a costly mistake. One of the very first and most important steps in investing is to choose what type of ownership structure you are going to use.
Investments can be made via an individual account, joint account, trust, company, personal super and self-managed super funds or a combination of any of these. The consequences of choosing the wrong one can be disastrous as it can lead to an expensive tax or legal bill. Choosing the right account ownership allows you to structure your investments in the most advantageous way for your situation, which can lead to superior outcomes, especially in regard to tax planning and asset protection. Nucleus Wealth caters for all these major investment ownership structures.
This article is to inform you of the advantages and disadvantages of each structure as well as when to use each one. Please note that any advice in this article is general in nature and does not take into account your personal situation.
Individual Ownership Structure
This is where assets are owned individually in your name. You solely own and control the investment. Any income or capital gains received is taxed at your marginal tax rate.
Advantages
- It is inexpensive and simple to set up as you invest in your name. Nothing else is needed.
- The 50% capital gains tax discount is available if you hold the investment for longer than 12 months.
- You pay tax on any income or capital gains at your marginal tax rate. This can be an advantage if you are on a low marginal tax rate and can take advantage of the $18,200 tax-free threshold. A common strategy is to place investments in the spouse’s name that is expected to earn the least.
- Capital losses can be offset against capital gains now or carried forward to be offset against future capital gains.
Disadvantages
- There is very limited asset protection. If you are a sole trader or in a partnership and get into financial trouble, creditors can come after your personal assets, and the investment will be at risk.
- You pay tax on any income or capital gains at your marginal tax rate. This can be a disadvantage if you are a high-income earner.
Joint Ownership Structure
This is where assets are owned jointly with another person. This is usually your spouse but is not limited to your spouse. The investment ownership is assumed to be divided equally, so each party owns and controls 50% of the investment.
Advantages
- The 50% capital gains tax discount is available for both account holders if you hold the investment for longer than 12 months. You can potentially reduce the overall tax paid on the investment compared to individual ownership if you are both on the same or lower marginal tax rates.
- Capital losses can be offset against capital gains now or carried forward to be offset against future capital gains.
Disadvantages
- There is very limited asset protection. Suppose one party cannot pay their debts. In that case, creditors can come after the personal assets of the individual, and half the investment will be at risk and can be liquidated.
- Any decisions made about the investment must be made jointly. Therefore you have less control over the asset.
Trust Ownership Structure
For the purposes of this article, we will only deal with discretionary or family trusts. A trust involves the trustee (either an individual or company) holding trust assets in their name or its own name, but for the benefit of beneficiaries (a group of persons or entities). The trustee has the discretion to distribute the net income of the trust as they see fit amongst the beneficiaries.
Advantages
- Trusts provide the greatest ability for flexibility in tax planning as the trustee can distribute income and capital gains to beneficiaries in a more flexible manner.
- Beneficiaries of a trust pay tax on any income received from a trust at their marginal tax rates or the corporate tax rate. This allows the trustee to distribute to beneficiaries on lower marginal tax rates, including corporate beneficiaries. This can dramatically reduce the overall tax paid on the investment.
- The 50% capital gains tax discount is available to individual beneficiaries if the investment is held for longer than 12 months.
- Trusts provide superior asset protection compared to individual or joint structures. The beneficiaries do not own the assets; they are owned by the trustee and held in trust for the beneficiaries. This can limit the liability of any beneficiaries.
- This structure is useful for individuals in business as any assets held in trust are generally not exposed to creditors if the individual in business gets into financial trouble.
- This structure is useful for minors or individuals that are not financially responsible. The trust owns the assets, and the trustee will do what they deem is best for the beneficiaries. This usually ensures the assets are not squandered or spent wastefully and are distributed at an appropriate age if necessary.
- Trusts can be excellent for estate planning purposes as the death of a trustee is not a capital gains event.
Disadvantages
- Establishing a trust can be costly and time-consuming. A solicitor or an accountant must set it up.
- Losses incurred by a trust remain trapped in a trust and cannot be distributed to beneficiaries. Losses that are incurred by the trust may be carried forward and offset against future assessable income of the trust.
- Trusts cannot retain income without being subject to penalty rates of tax. Therefore it is incentivised that all income is distributed, and this may not be at tax-effective times for beneficiaries.
- Most discretionary trusts formed in Australia have a fixed lifespan of 80 years. However, trusts formed in South Australia can exist in perpetuity. This means there is no set timeframe where the trust becomes void and ends (this excludes trusts created with charitable objectives).
Company Ownership Structure
Companies are most often used as structures for business, but a company can also make investments.
Advantages
- The company tax rate is 25% or 30%, depending on the size. If you are on a higher marginal tax rate, investing through a company may be more tax-effective.
- Dividends are split between all eligible shareholders.
- Companies offer asset protection for their shareholders via limited liability.
- Companies can retain earnings and do not have to pay out dividends, so there is more control over when income is distributed to shareholders. Retained earnings can be more advantageous than trusts, as trusts have to distribute each year or face penalty tax rates. This allows payouts at the most opportune time, for example, when the shareholders are not working.
- Losses can be carried forward indefinitely and offset against future income, provided certain requirements are met.
Disadvantages
- There is no entitlement to the tax-free threshold. You must pay tax at the company tax rate from the first dollar’s profit.
- There is no 50% capital gains discount for holding assets longer than 12 months, as capital gains are paid at the company tax rate on the whole amount.
- The costs to set up a company are high, as well as high ongoing costs.
Personal Superannuation Ownership Structure
Personal Super is also a form of trust and is compulsory for any employee in Australia. However, the administration of the trust is handled by an external party in the case of a personal super account.
Advantages
- Superannuation funds only pay tax at a maximum of 15% while in the accumulation phase, which may be lower than your marginal tax rate.
- If assets are held longer than 12 months in the accumulation phase, they are entitled to the ⅓ discount, and the effective tax rate is 10%.
- In pension phase, superannuation is a completely tax-free environment. This will be higher than your marginal tax rate if you still work and earn over $18,200 p.a.
- If a person becomes bankrupt, funds that are held in their superannuation are protected from creditors in most situations.
- Capital losses can be carried forward and offset against future assessable capital gains.
Disadvantages
- Your money is locked up and usually cannot be accessed until you meet a condition of release. This is usually your preservation age.
- You may not have as much access to a variety of investment options as you would like. However, Nucleus Wealth offers a significant number of ways for you to personalise your superannuation investment, including around 50 different ethical, asset class and sector screens to help you align your investments to your ethical values, beliefs or specific market views. There is a lot more customisation than many regular personal super accounts.
Self Managed Superannuation Fund Ownership Structure
Self Managed Super Funds are also a form of trust. However, unlike personal superannuation accounts, you are required to administer it yourself. As a result, it is often advisable to have a significant balance and sophisticated knowledge of investments in order to make this worthwhile.
Advantages
- Superannuation funds only pay tax at a maximum of 15% while in the accumulation phase, which may be lower than your marginal tax rate.
- If assets are held longer than 12 months in the accumulation phase, they are entitled to the ⅓ discount, and the effective tax rate is 10%.
- In pension phase, superannuation is a completely tax-free environment. This will be higher than your marginal tax rate if you still work and earn over $18,200 p.a.
- If a person becomes bankrupt, funds that are held in their superannuation are protected from creditors in most situations.
- Capital losses can be carried forward and offset against future assessable capital gains.
- You have full control over how your money is invested, including the option for direct real property.
Disadvantages
- Your money is locked up and usually cannot be accessed until you meet a condition of release, which is usually your preservation age.
- There is significant added cost involved as there are annual audit requirements, accounting and administration costs.
- There is significant time required to make sure the funds are managed appropriately, and all compliance obligations are met.
Quick tip: If you invest with Nucleus Wealth, you can have multiple different account structures, and you can group all these accounts together to save on the administration fee. Plus, you can have up to six members of your family with different account structures grouped together under this same family group account aggregation to also save on the administration fee.
A case example for the use of a trust
An example of setting up a trust and investing through that ownership structure rather than having it in your individual name is when you are early in your life. You may meet a partner and have a family; this will bring the flexibility to distribute income to the lower-earning beneficiaries and significant asset protection compared to owning it individually. A trust will allow you to be flexible as your circumstances and life change. This will allow you to plan and minimise the amount of tax you pay legally. However, it comes with an additional annual cost.
Further Thoughts
Any transfer out of a particular ownership structure into another one is a capital gains event.
It is vitally important to get the structure right at the start of the investment, with a long-term understanding of how your circumstances may change over the life of the investment. This article is not an exhaustive list of the advantages and disadvantages. Please seek specific tax advice from a registered tax agent or seek advice from a professional licensed financial adviser.
You can book a call here to discuss this article, investing with Nucleus Wealth, or your current investment.
