If you are looking to start or grow your investment portfolio, it is essential to consider the structure when contemplating any investment.
There isn’t a definitive “correct” investment structure, but more suitable options are based on individual circumstances. Selecting the most appropriate investment structure is equally crucial as the investment itself.
The choice of investment structure has significant implications for investors’ risk profiles, tax obligations, and the amount of control over their investments.
Several types of investment structures are available, each with advantages and disadvantages. Let’s explore investment structures in more detail.
What Are The Different Types Of Investment Structures?
Typically, there are four primary investment structures: individual or personal ownership, ownership through a trust, ownership through a Self-managed Super Fund, and ownership through a company structure. Each structure has its unique aspects that must be taken into account.
Individual or Personal Ownership
The most common and straightforward investment vehicle is a person holding investments in their name. Assets in an individual name can be easy to set up and manage as income and capital gains are included in the individual’s tax returns.
The main advantage of this structure is the control and flexibility it provides the investor. However, unlimited liability exists, meaning the investor is personally responsible for any losses—assets held by an individual offer no flexibility with income distribution.
Individuals in high-risk occupations are vulnerable to sue, and their assets could be exposed to risk from creditors. Negatively geared investments an individual holds will eventually become positively geared, resulting in increased tax liability over time. The same advantages and disadvantages apply to assets held jointly.
Ownership Through a Trust
A trust is a legal structure where a trustee holds property or assets for the benefit of the beneficiaries. The trustee is responsible for managing the trust and making investment decisions. Trusts can be used for various purposes, including holding property or investments, managing a business, or distributing income to beneficiaries.
A trust can distribute income and capital gains per the trust deed. However, it cannot distribute losses. Losses can be carried forward to be offset against future income. A trust can also retain income; tax is payable at the top marginal rate plus the Medicare levy if that income is taxable.
Four main types of trusts exist: Discretionary, Unit, Hybrid and Superannuation funds.
One of the benefits of a trust is the flexibility to distribute income and assets to beneficiaries. However, the disadvantage is the complexity of managing and administering the trust. Paying someone to manage the trust would impact how you calculate the return.
Ownership Through a Company
Companies are often used as a structure for business but could be a good option for property developers or full-time property investors.
A company is a separate legal entity that shareholders own. The company is managed by directors whom the shareholders appoint. Therefore, shareholders have limited liability for the company’s debts and obligations. However, there is an initial investment.
The main benefit is that companies pay tax on their profits at the corporate tax rate, and shareholders pay tax on any dividends received. You also get increased asset protection under a company structure but cannot access the capital gains tax discount.
The most considerable disadvantage is the complexity of managing and administering the company. Ensure it is worth the set-up and maintenance before choosing this structure.
Ownership Through a Self-Managed Superannuation Fund (SMSF)
An SMSF is a superannuation fund where the members are also the trustees. SMSFs incur a significantly lower tax rate and can be used to invest in various assets – including property, shares, and cash.
A key reason for the favourable tax treatment of superannuation is that the Federal Government wants to encourage people to invest and create wealth to allow them to retire comfortably and not rely so heavily on social security benefits.
SMSFs have strict regulations that must be followed, and the trustees are responsible for managing the fund and making investment decisions. One of the benefits of an SMSF is the control over investment decisions and the potential tax benefits. However, the disadvantage is the complexity of managing and administering the fund.
Suppose an SMSF is appropriate to be established for your circumstances. In that case, it is legally required to have your records audited each year and to prepare and submit an income tax return to the Australian Taxation Office.
What Investment Structure is Best Suited for You?
The choice of an investment structure is crucial for building future wealth.
The various investment structures in Australia offer different benefits and drawbacks, and investors should carefully consider their goals, risk profile, and tax obligations when choosing a system.
It is also essential to seek professional advice from a financial advisor or tax specialist to ensure compliance with regulatory requirements and maximise the benefits of the chosen investment structure.
Contact one of our advisors and start investing today.