Investment company can complement super for retirement

Investment company can complement super for retirement

Discusses a strategy for those that have or will reach the contribution limits and desire a pension income that would be difficult to achieve through super pension alone.

Summary:

1. Setup a personal investment company, and lend additional investment funds to this company that invests (say in shares).
2. Once in retirement if higher income is required than what can be achieved through the super pension alone additional funds can be drawn from the investment company.
3. Because the money has been loaned to the company over the years, the funds drawn out each year can be taken tax-free and applied against the loan account.
4. From a tax viewpoint, because the company owes money to the family member, it is not viewed as “borrowing” and therefore doesn’t fall under the division 7A rules whereby the Australian Taxation Office concludes that if a company lends to a shareholder it is to be treated as income, a dividend, to that individual.

My alternative idea where residential property equity/security is available:

1. Utilise loans secured by residential property to invest (say in shares) with borrowed funds, with additional investment funds used to (partially or fully) offset the debt. The % of offset funds vs debt could be "optimised" to achieve the equivalent (or less) of 30% company tax rate on earnings on the net equity during accumulation
2. Once in retirement if higher income is required than what can be achieved through the super pension alone additional funds can be drawn as cash out of the offset account, or by selling down capital (shares), and paying CGT.

Seems much simpler to me (maybe better for the DIY investor) and depending on the amount of 'additional investment funds' available during accumulation account, may achieve a similar outcome in terms of tax efficiency.

Obviously relies on being able to secure borrowing prior to retirement, but as we know this is achievable with some good planning.

I havn't run the numbers on this yet for my particular circumstances, but interested to hear other's thoughts.

 

yes both legitimate strategies a discretionary trust with a bucket company is an alternative too

 

Thank you for sharing this. Speaking purely from a tax efficiency perspective, are these strategies only work for people who are likely to end up with $1.7m in their super at retirement?

 

I can't comment specifically, but if this was me and I was happy to wait until preservation age to access the funds, then I would preference accumulating additional funds into superannuation.

 

Yes

Think about it. Someone on $300,000 pa income and investing in their own name would be paying 47% tax on any investment income. If they structured with a trust and bucket company or a company, make an interest free loan to it. the tax rate could be capped at 30% - initially.
That means for every $100,000 pa in investment income there would be $17,000 extra capital to invest per year. Over 10 years without compounding that could be $170,000 extra capital, with compounding it could be a **** load more.

Then in retirement take a dividend from the company when the tax rate is lower and get a credit for the 30% tax rate the company has already paid. This could mean a little bit more tax is payable or it could mean you get a refund of the tax already paid.