Could private investment companies be the new SMSFs?

Could private investment companies be the new SMSFs?

 

I have long argued that taxation of trusts as companies offers more strategy and may close some of the unfounded views that trusts are a tax scheme. Until a comprehensive rewrite of tax law and trust taxation specifically occurs that wont occur. The ATO cant even determine what a "fixed trust" is and tax law doesnt even approach explaining what a "family trust" is. Technically speaking they dont exist.

The key difference with a SMSF is that a contribution to a SMSF (indeed any complying fund) can be deductible where any form of contribution to any other form of trust does not enjoy that benefit. The second broad benefit of a superannuation trust is the generous tax concessions of 0, 10 or 15% tax. Perhaps it is SMSF and Tax Law that requires a rewrite ? Instead the Govt has proposed a broader expansion of deductions for super contributions than ever permitted.

The key failing in the article is that a person who is a shareholder can never hold a absolute entitlement to company income or capital until it is given by the company officers to them. e its not theirs. Shareholders cannot demand income !! A super trust however has a member entitlement that vests with conditions and time. And even when a shareholder may demand income or capital it is a taxation event. (Hence the need for rewrite)

This trust basis of foundation for super is they key protection that the article omitted. And which is the foundation for all retirees to expect future retirement income.

The other "problem"the article ignores is that yes a company make a great asset protection vehicle. Since company assets are NOT personal assets. That lack of absolute entitlement and control may also pose a weakness. Owning shares in a investment rich company are still an asset of the person and unprotected from claims.

 

The huge KEY difference between Super and Other Structures for a number of investors is obviously ACCESS!

Our goal was to retire before 55 let alone 60 plus which could well be the case for younger superannuants in their future. Fortunately we achieved that. It would seem that many on this forum dream of retiring well before 60. Hence why some are interested in Investment Companies or a Disc Trust rather than Super being their primary focus.

@Terryw, @Paul@PFI a question if you have the time please, not for me as we're sorted but for others I know who have raised this question at times. Sorry if it's already been answered. Of course a generalised answer only.

Scenario:
1. Husband and wife are both high income earners.
2. Have no or minimal beneficiaries.
3. Aren't concerned about asset protection.
4. Want to retire early.

Which would generally be the best structure excluding Super for purchasing shares / listed funds to buy and hold:
1. Company?
2. Disc Trust?
3. Disc Trust + company?

Cheers

 

I am not sure that question can be answered without more information such as the nature of the investment. For example, if the investors are actively trading properties or shares, they may benefit from the CGT concessions, in which case a trust structure could benefit them. Conversely, if they are buy and hold and it is more important to be able to retain profits to distribute as income to the investors in subsequent years, they could benefit from a company structure.

Perhaps a combination of both would be advantageous for reasons probably only @Paul@PFI, @Terry_w or @MikeLivingTheDream (for example) could answer.

 

LOL...It depends. Legal, financial and tax advice may all influence the choice.

Why is 4 . Super not a consideration ? Esp if you areg aged 55 and approaching the golden super years. High income and super are perfect buddies. I have seen others do very well in 40s with super and their fund is like their bank - Personally managed and growing steadily under their control. Sure they cant take it out but its retirement savings. They may even wind back their strategies for building super knowing that part is working. Where others build aggreesively in their 50s and 60s. If persons are high income earners and there is no need to access all the capital a superannuation strategy may be the gift that keeps giving.

I dont believe the strategy is ever to retire and whip every cent out of a company or trust so why do that with super either ? Super can be the gift that keeps given throughout retirement and even after death. Super is badly misjudged by those who dont understand it and throwing hands in the air and saying that it doesnt work belies its power. Its a tax scheme (SMSFs at least) that is regulated by the ATO !!

I dont see how access is improved through a company or trust. Its still not yours. After all super is just another type of trust. And the very nature of a SMSF says its is self-managed. You cant get better access.

The sole limitation (which is a benefit IMO) is the super is preserved and discussions about whipping it all out prior to the correct age is more a issue as in super at least after age 60 it can be tax free.

A balanced approach should always consider super and if it works then use super as a part of any strategy. Sometimes its also a impossibility. I wish I had a dollar for every client who has asked me if their super can buy their IP from them. Its the sign they waited too long for advice on structure and the one black rule of super is that it cant buy anything from a member or relative.

 

Oops, thanks for that. I meant to add buy and holding of shares / listed funds in the scenario. Just updated my previous post now.

For the record In the above scenario this is what I assume to be the case also. But we've never used an Investment Company just the combination of a DT and SMSF which has worked perfectly in our situation. So I've never really looked deeply into the benefits of an investment coy vs DT.

But was curious about the general opinion from the experts.

 

If you anticipate retiring at 50 you should structure your assets outside of super to last from 50 to your preservation age. At that point in time your superannuation fund should fund (to the full extent it can) the balance of your retirement.

Your choice of tax and legal structures should not ban one type of entity altogether for the reason of access alone.

 

Access to super is an issue for someone who retires at 45 or 50. The question is which vehicle is best for investment income to be accessed after retirement but before an investor turns 60... own name, trust, company combination etc. The answer is: it depends.

 

Impossible to answer based on the limited facts.

your question is like asking a doctor what the best medicine is because you are 'sick' - depends on many factors.

Sounds like you are not considering the estate planning, succession on death and incapacity, land tax, stamp duty on restructures etc

Land tax is a biggie and this varies from state to state.

 

Sorry - no land tax on shares!

I would be in favour of a discretionary trust, generally, but all the other legal aspects need to be considered.

 

Hi @Paul@PFI, I obviously worded my post poorly. By ACCESS I meant the ability to live off / spend the capital / income from one's assets a LONG time before reaching Super preservation age.

Of course Super should feature in one's investment strategy. It's the best game in town when it comes to reducing tax but more limited after 1 July. But I wanted to focus the question on the thread topic bring Investment Companies. The assumption is that Super is there from preservation age onward. BUT prior to that could an Investment Company be useful as a Structure to live off these investments if one retires much earlier than Super Preservation age?

There's a number of us on the forum who have retired early, well before we could access Super. Hence why Super as great as it is later in life after preservation age is not going to provide for early retirees. I'm ignoring limited Super early access strategies involving mixed age members etc that come with some risk.

 

Thanks,

Teach me to ask questions on what I've heard other's mention. Glad I've only got a DT and SMSF. I have no desire for any additional complexity.

 

Great post in layman speak.

In a long winded way that's all I was getting at. And should one be interested in retiring early the question was merely in certain circumstances could an Investment Company be beneficial?

I need to attend a writing clearly course I think or cut down on the home brew.

 

Do not cut down on home brew.

 

No 50% CGT Discount?

 

A bullet solves many problems but may be a bit drastic if you're suffering from hemorrhoids.

 

Well that nails it, advice tailored specifically for the client. If I want further advice you're the man.

 

This is one consideration. Another consideration is the ability to retain earnings.

For example, you build a house for $300k, it doubles in value and you sell. If the house is held in a DT, the 50% CGT concession may apply but the trust would need to distribute all of its income at the end of the year? If the house is held in a Company, the 50% CGT concession would not apply, but earnings could be retained and distributed in subsequent income years as fully franked dividends. i.e. $50k per year for x years.

 

from a purely tax point of view a DT is better than a company because of the ability to get the 50% discount. All other benefits of a company can be achieved with a DT by diverting money to a bucket company. So that income can be shifted across tax years. Of course any bucket company should be owned by another discretionary trust.

But a company is better from a death point of view as it can be more easily controlled. If shares are owned individually (which they probably shouldn't) then control is easily passed by willing shares.

 

Hi @Terry_w,

I've seen you mention this in the past. Can you elaborate more on why two Discretionary trusts are needed with the bucket company?

I also think @Paul@PFI from memory mentioned issues with using a bucket company eg