Choosing the Right Investment Structure

In the investment world, one of the key decisions you’ll face is choosing the right structure to house your investments. This structure dictates how you own and manage your assets, impacting factors like taxes, access, and asset protection. Here’s a breakdown of some common investment structures available in Australia, along with a summary of the pros and cons for each.

1. Personal Ownership

What it is: The simplest structure, where you directly own the asset in your personal or joint names

Pros: 

• Straightforward setup: You typically sign some documents and the assets are then deemed to be owned by whoever applies for the investment.
• Lower fees: as no structures are being set up or managed, the ongoing fees will likely be lower.

Cons: 

• Limited asset protection: Your personal assets are potentially on the line if someone sues you.
• Potential for higher taxes on investment income: Depending on your tax bracket, you may face a higher tax bill compared to some other structures which we explore below.

2. Investment Bonds

What it is: An investment wrapped in a life insurance policy, offering potential tax benefits and a death benefit for beneficiaries. Learn more about investment bonds in our article here. 

Pros:

• Tax-advantaged growth: Earnings within the bond may be subject to lower tax rates compared to direct share ownership depending on your individual marginal tax rate. Investment bonds are taxed at a maximum of 30%.
• Potential asset protection: Having assets within this structure may give a stronger level of asset protection should you be sued.

Cons:

• Fees: There will be ongoing administration fees for the investment bond platform and these can vary across the providers. 
• Limited investment choices: The investment universe within investment bonds will usually be narrower than some other structures which may not align to your investment preferences.

3. Companies

What it is: A separate legal entity used to hold and manage investment assets.

Pros:

• Strong asset protection: The company’s assets are separate from your personal liabilities.
• Potential for tax benefits: Companies can be a tax effective option for people on higher marginal tax rates. Investment income within investment companies are taxed at 30%.

Cons:

• Higher setup and ongoing compliance costs: Establishing and maintaining a company involves legal and administrative fees.
• No capital gains tax discount: Investments within a company are not eligible for the capital gains tax discount and therefore consideration should be given to the specific types of assets held within this structure.

4. Family Trusts

What it is: A legal arrangement where assets are held by a trustee for the benefit of beneficiaries. Useful for asset protection and tax planning where there are multiple beneficiaries (e.g. family members).

Pros:

• Flexibility in managing distributions for tax planning: Trusts allow you to specify how income and capital are distributed among beneficiaries to manage your tax outcomes.
• Asset protection benefits: Trusts may help to shield assets from creditors if set up correctly.
• Capital gains tax discount: Family trusts have access to the capital gains tax discount on assets that have appreciated in value.

Cons:

• Setup and ongoing costs associated with the trust: Establishing and administering a trust can incur legal and administrative fees.
• Any losses are quarantined in the trust: If your investments are running at a loss, these losses are quarantined within the trust and not able to be used to reduce your personal taxable income. 

5. Superannuation

What it is: A tax-advantaged retirement savings vehicle mandated by the Australian government. Some contributions may be tax-deductible, and investment earnings are taxed concessionally up to and throughout retirement.

Pros:

• Significant tax benefits for contributions and earnings: Some contributions receive a concessional tax treatment, and investment earnings within super are tax at a maximum of 15%.
• Provides retirement income security: Superannuation offers a dedicated pool of funds to support you financially after you stop working and help to encourage long terms saving.

Cons:

• Restrictions on accessing funds before retirement: You are unlikely to be able to access your funds until you meet a condition of release such as stopping work over the age of 60. 

Choosing the Right Investment Structure

The optimal investment structure depends on your individual circumstances and goals. The access to your money, types of investment available, the tax various implications and the level of potential asset protection should all be factored into any decision to use one structure over another. Determine what might works best for your own situation requires a careful analysis of your financial goals and strategy.