Which Entity to Use When Investing
It’s important to consider the most appropriate entity to use when you’re investing. This will depend on the type of investment that you’re making and your individual financial circumstances.
In addition to investing as an individual, you could also consider investing via the following entities:
- a trust,
- a company, and
- your self-managed super fund (SMSF) if you have one.
We’ll now look at each of these potential investment entities in more detail.
Investing via a trust
A trust is a legal entity that is set up with a trust deed that outlines how it will operate. A person or company (the trustee) holds assets in the trust on behalf of beneficiaries. The trustee is responsible for deciding how the income or assets of the trust are distributed to beneficiaries.
Trusts must have a tax file number and its trustees are responsible for lodging the trust’s annual tax return with the Australian Taxation Office (ATO).
A trust can be a tax-effective investment vehicle because income and capital gains can be strategically distributed to beneficiaries who have a lower taxable income and therefore lower marginal tax rates.
A trust can also retain income rather than distribute it to beneficiaries. However, if it does, the income is taxed in the trust at the highest marginal rate (currently 45%) plus Medicare levy (currently 2%).
It’s important to understand that although income and capital gains can be distributed to beneficiaries in accordance with the provisions of the trust deed, capital losses cannot. Instead, they can be carried forward and offset against future trust income.
Investing via a company
Companies are typically set up as business entities, but they can also be used as investment vehicles. However, the set-up costs to establish a company can be high, so the benefits need to outweigh these costs.
There can be tax benefits of investing through a company. The company tax rate in Australia for businesses with an annual turnover less than $25 million is 27.5%, and it’s 30% for larger businesses. Both of these rates are lower than the 32.5% marginal tax rates for individuals who earn between $37,000 and $90,000 per year.
Investing via your SMSF
An SMSF is a trust vehicle that is set up to provide retirement benefits for its members. An SMSF can have one to four members. All SMSF members must also be trustees of their fund.
SMSFs can invest in a range of assets, including shares, term deposits, managed funds, and residential or commercial property. The opportunity to directly invest in property is an option available to SMSFs that is not available to other types of super funds.
Superannuation is a very tax-effective investment vehicle because fund earnings (including those of SMSFs) are taxed at the concessional rate of just 15% in Australia, which is lower than even the lowest marginal tax rate.
If you’re investing via your SMSF, it’s important to obtain independent professional advice to ensure your legal compliance with superannuation legislation.
How we can help
At Qi Wealth, our experienced, expert team of financial advisers can help you to determine the best entity to use for your investments, taking into account your short and long-term goals as well as the tax effectiveness of each option. We’ll take the time to understand your individual circumstances so that we can provide you with the best possible advice. We develop long-term, trusted relationships with our clients.
Contact us today to find out how we can help you!