When you’re considering making an investment it’s crucial to consider the structure you’re going to use.
An investment structure refers to how your investments are legally owned. As we advise our clients, there is no one “right” investment structure—but there are better choices you can make, depending on your personal situation. So making sure you choose the best investment structure to use is just as important as the investment itself.
The importance of choosing the best structure
The best investment structure is one that allows you the greatest opportunity for strong future returns on your investment, and provides you with the best long-term tax outcome.
The “wrong” structure has the potential to reduce your overall investment return by up to 50 per cent, and once you’ve made your investment under one structure it’s difficult to change to another—so it’s important to know exactly what you’re getting yourself into before you invest.
If you have any uncertainty around which will work best for you, get in touch with a business structures expert. We'll take the time to understand your circumstances, and can provide you with the right advice.
You can also bring a Liston Newton virtual CFO onboard to help you plan, model and perfect your business's financial future.
Choosing the best investment structure for your situation
The structure you choose has a big impact on the amount of tax you pay on your investment’s income, and the capital gains tax (CGT) you’re likely to pay when it’s sold. Choosing the best investment structure also serves to protect your assets (which is particularly relevant for business owners).
There are three main investment structures you’ll generally look at—personal, a trust, or under a company structure—and each one comes with its own considerations.
The individual structure
What it is
A indivdual structure, or a personal investment, is the easiest and most common investment structure, where the individual puts the investment in their own name. It makes sense for relatively straightforward investments, such as a family home, or a piece of art.
Who it works well for
This structure can work well for both high- and low-income earners, and can take advantage of negative gearing to reduce annual tax bills. A personal investment structure can also make use of the 50% CGT discount when the investment is sold.
What to consider
You may face more risk with a personal investment structure. For example, investing in your own name allows little flexibility when it comes to distributing income, and if you’ve signed a personal guarantee for a business loan and the business goes bad, the lender could go after any investments held in your personal name.
You can find out more about a personal investment structure here.
The trust structure
What it is
Where significant amounts of money are going to be invested, a trust is a good investment structure to choose. A trust structure is formed by the execution of a deed that documents the establishment of the trust, which determines which beneficiaries receive what percentage of income from the investment.
Who it works well for
A trust structure can be a good choice when making an investment between a group, such as a family, as it distributes income between all trust members. A family trust set up as an investment vehicle can be a suitable structure for negatively geared property or shares. As with a personal investment, a trust can make use of the 50% CGT discount when the investment is sold.
What to consider
A trust can’t distribute its losses, so it needs another income stream flowing in to offset them, such as business profits that can be distributed into the trust each year.
Get in touch with one of our advisers to learn more about the trust investment structure.
The company structure
What it is
A company investment structure can be used by individuals or businesses looking to make an investment. It’s a good investment vehicle when all the investors are of a suitably high income, as the investment’s income is taxed at a flat 30% tax rate, regardless of your personal tax bracket.
Who it works well for
Companies can accumulate investments in listed shares, as dividends are already taxed at a 30% tax rate and receive a franking credit for tax already paid. So when the dividends are received in the company, no additional tax is paid.
What to consider
The downside of companies as investment structures is that they don't receive the 50% CGT discount like other structures do, and any losses can only be offset against future income within the company.
You can find more information about company investment structures here.
The pros and cons of different business structures
We’ve pulled together a table of the pros and cons for each structure, to give you an easy way to determine which will be the best investment structure for your situation.
Questions to ask
There’s a lot to consider when making an investment. It’s all about choosing the best investment structure for your situation, so asking yourself the right questions can make all the difference between a good and bad investment.
We recommend asking yourself the following questions, at a minimum:
- Who will receive the investment income, both for the short term and the long term?
- When the investment is sold, who will receive the capital?
- Could the owner of the investments be exposed to financial or legal trouble?
- Are there specific family circumstances that need to be considered?
- Will debt and leverage be used, and if so, how can you utilise any losses?
- Will there be any estate planning issues need to be addressed?
