Note: Published April 2024. Since then Division 296 has become law, which makes the comparison between super, companies and trusts even more relevant. See Division 296 is law.
Following changes to the stage three tax cuts, affluent individuals are looking more closely at investment companies as a way to manage wealth tax-effectively over the long term.
With changes to tax brackets and further proposed changes to superannuation, investment companies are a compelling option for higher earners. Super remains valuable, but its appeal has narrowed because of contribution limits, caps on pension balances and additional tax on higher balances. Investment companies, by contrast, pay a flat 30% rate, which is attractive for people on the top marginal rate.
Benefits and considerations
Beyond tax, investment companies can help with asset protection and estate planning. A company continues even if a key person dies, and ownership and control can be passed on smoothly. Flexible share structures and the ability to retain and reinvest profits make them adaptable. Super, on the other hand, comes with contribution limits, regulatory constraints and tax on some death benefits.
Compared with family trusts
Trusts are tax-effective because income is distributed to beneficiaries, but they can’t easily retain income without paying tax at the top rate. Companies can retain profits and pay dividends later, so funds can be reinvested without immediate cash leaving the structure. Like any structure, investment companies are still subject to anti-avoidance rules, including Part IVA and Division 7A, so they need to be set up and run with care.
Capital gains
Companies pay the flat rate on capital gains and don’t get the 50% CGT discount. Individuals receiving capital gains through a family trust usually can. That trade-off is central to deciding which structure should hold growth assets.
The answer is usually a combination
High-net-worth investors need to weigh up investment companies, super and family trusts carefully. In practice, a tailored combination of structures usually produces the best result.
Which structure should hold what?
Super, trust, company or your own name. We’ll map where each dollar should sit, with your accountant.
General information only. Not tax advice. Seek advice from a registered tax agent about your circumstances.
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