Is an investment company better than a trust?

The right investment structure can help minimise your tax and protect your investment. 

At Poole Advisory, a leading Sydney and Southern Highlands financial advisor, we’ve noticed clients are curious about using the company structure for investing. The company tax structure does offer strong asset protection and a tax rate of 30%… but is this better than using a family trust? 

To help you know what the implications are, here we compare the two options against investing as an individual.

If you’d like more certainty specific to your situation, book a complimentary Introduction Meeting with Anthony Poole today.

Your investment structure affects your tax, super and assets

In Australia, there are three types of structures you can use to invest:

• individual
• family trust
• company

Investing as a family trust or as a company is particularly helpful for business owners and people with high incomes.

Investing as an individual

This is the most common structure. It’s easy to manage and there are no management costs. You can also make the most of the 50% capital gains discount, which can be a good advantage in a range of areas, such as with growth like investments, it’s easier to administer and simpler to manage.

The downside is that investing as an individual doesn’t offer much flexibility to distribute income, which can increase tax liabilities. 

Further, there is also no protection of that asset. 

Investing as a family trust

A trust is set up when making an investment as a group – usually, a family. It makes clear the beneficiaries of the income from an investment. This works to protect the asset exclusively for those beneficiaries and ward off litigation from creditors, as it’s not owned by a single person. 

This is also helpful for investing in negatively geared property or shares, as losses can be carried forward and offset against future income. For that to work well, though, the trust does need at least two income streams for it to be tax-effective.

For positively geared investments, the group can split any returns of the investment, which can minimise the tax impact. A family trust can also benefit from the 50% capital gains discount for assets held for a minimum of 12 months.

Investing as a company

This is the more complicated option but can reap significant rewards. It’s best used for high-income earners, as companies incur a flat tax rate of 30%. 

That’s still not as good as superannuation, given the contribution limits of super which keep tax low up to a certain point. A company investment, therefore, might be a good option to complement your super strategy. It’s also beneficial to note that company investment can also be owned by family trust, with income distributed to the investment company.

A company can also have unlimited shareholders, which makes this helpful for estate planning. Looking to the long term, income from fully franked dividends don’t incur additional tax.

The biggest drawback is that companies don’t get access to the 50% capital gains tax discount. It’s important to weigh up the difference in tax liability between the two options. Nonetheless, income producing investments could benefit from assets within the company.