Types of Investment Structures

The most common and simplest investment vehicle is a person holding investments in their own name, either singly or jointly. Investments in an individual name can be:

• Easy to set up and manage as income and capital gains are included in the individual’s own tax returns.
• Easier to administer as there is much less paperwork in comparison to other structures.
• More cost effective as there are no additional expenses to set up and run.
• More tax effective, especially if the investment is negatively geared or one of the individuals is a low income earner.
• Tax advantaged if the investment is the family home.

However, assets held by an individual offer no flexibility with the distribution of income. Individuals in high-risk occupations could be sued and their assets exposed to risk from creditors. Negatively geared assets held by an individual will eventually become positively geared, resulting in an increased tax liability over time.  The same advantages and disadvantages apply to assets held jointly.

Types of investment structures – Partnerships

A partnership is also a relatively simple structure and costs to set up are fairly low. A partnership (as opposed to holding an investment in joint names) is a separate entity for taxation purposes and requires its own tax file number and tax return. A partnership does not pay tax but must distribute income to the partners according to the partnership agreement so offers limited distribution flexibility.

There is no risk protection in a partnership as the assets of either partner may be subject to a claim by a creditor as all partners are jointly and severally liable. This means that one partner could become personally liable for all the debts of the entire partnership.

Companies

Companies are most often used as a structure for business rather than for investments, but if you choose to hold investments in a company the main benefits are:

• the tax rate on profits is 28.5% or 30% (depending on the size of the company), so if you are on a high taxable income paying 48.5% a company tax rate may be more tax effective.
• protection for shareholders if the business fails or is sued.

A company structure has disadvantages, particularly for investments, as losses can only be offset against future income within the company and a company is not able to obtain the benefit of any capital gains discount on the sale of investments.

The costs to set up a company can be high and there is a requirement for a separate set of accounts and tax return each year as well as ongoing ASIC registration costs. A company can distribute profit by paying a dividend, but this must be in accordance with the shareholder registry.

Trusts

Trusts are a popular investment structure, but are often poorly understood.

Briefly, the trust is formed by executing a deed which documents the establishment of the trust. The trustee may be either a natural person or persons or a company. The trustee as allowed by the trust deed determines to which beneficiaries and in what proportion the income/assets of the trust are distributed. If the trust has made a net profit, franking credits can also be distributed to the beneficiaries.

A trust cannot distribute losses, but losses can be carried forward to be offset against future income.  There are three main types of trusts:

• Discretionary – The trustees of a discretionary trust are able to distribute income and capital gains to beneficiaries in whatever way they desire (typically the most tax effective). The assets of the trust are also protected in the event of litigation against beneficiaries as there is no single individual that owns any assets. Therefore creditors of an individual cannot access any assets held by a trust. Beneficiaries who receive capital gains can claim the 50% capital gains discount where the asset has been held for more than 12 months.
• Unit – A unit trust is one where the assets are held and administered by the trustee of the trust for the holders of units in the unit trust. This means that unit trusts pre-determine the unit holders’ entitlements, which may be for income, capital or both.  Unit trusts are often used where unrelated parties run a business together and for managed funds where investors hold units in the trust.  They have limited application for most personal investments.
• Hybrid – Hybrid discretionary trusts can be hybrid discretionary or hybrid unit trusts.  The former are the more common, take the best features of both discretionary and unit trusts and mix them together in the one entity to create a powerful and flexible tax planning solution.

For more detailed information on trusts read more at All Trust Structures .