Building Significant Wealth? How You Own It Matters

When we think about building wealth, the conversation often starts with investments. Should you own shares, property, term deposits or bonds? Or perhaps a diversified mix of several asset classes?

For people who have accumulated significant wealth, however, another question can become just as important: where should those investments be held?

Investments can potentially be owned personally, through a company or trust, or within superannuation. Each structure operates differently and can affect tax, access to capital, retirement planning and the eventual transfer of wealth to the next generation.

This means investment selection should not be considered in isolation. As wealth grows, what you own and how you own it can both influence your long-term financial position.

Don’t Just Ask “What Should I Invest In?”

Consider two families with similar investment portfolios earning similar returns. At first glance, you might expect their financial outcomes to be broadly the same.

But if their investments are held through different structures, their after-tax outcomes and planning options could be quite different.

For example, Australian resident individuals can face a top marginal income tax rate of 45%, plus the Medicare levy where applicable. The general company tax rate is 30%, while companies that qualify as base rate entities may be taxed at 25%. Eligibility for the lower company tax rate depends on specific requirements, including aggregated turnover and the proportion of assessable income that is base rate entity passive income. Investment income such as interest, rent and net capital gains can be treated as passive income for these purposes.

This does not mean placing investments in a company will automatically produce a better result. Companies have their own tax rules, costs and restrictions. Importantly, money held by a company belongs to the company. Extracting that money for personal use can have additional tax consequences.

Trusts operate differently again. Depending on the trust deed, applicable tax rules and family circumstances, a trust may provide flexibility around how income and capital are distributed. However, trusts also involve additional administration and legal responsibilities.

The key point is simple: ownership matters. As your wealth grows, it can be worthwhile reviewing whether the structures that were suitable when your portfolio was smaller still make sense today.

Think Beyond This Year’s Tax Bill

With a substantial portfolio, relatively small differences in annual after-tax returns can become significant when compounded over many years.

Suppose a portfolio generates considerable investment income each year. If the investments are owned personally, that income is generally assessed at the owner’s marginal tax rate. Holding investments through a company or trust can produce different outcomes depending on the circumstances and how income is earned, retained or distributed.

Companies, for example, may pay franked dividends to shareholders. Franking credits broadly recognise tax already paid by the company and can offset some of the shareholder’s personal tax liability. The final outcome will depend on factors including the shareholder’s taxable income, the company’s tax and franking position, and how much is ultimately distributed.

Capital gains also need to be considered.

Under current rules, eligible Australian resident individuals and trusts can generally access a 50% capital gains tax discount on eligible capital gains from assets held for at least 12 months, subject to the relevant conditions. Companies generally cannot access the 50% CGT discount.

This highlights an important point: a structure that appears attractive when considering annual investment income may look less attractive when future capital gains and the eventual extraction of money are considered.

The objective should not simply be to minimise this year’s tax bill. A more useful approach is to consider the long-term after-tax outcome, together with flexibility, costs and your broader financial objectives.

Superannuation Is Powerful, but It Is Only Part of the Picture

For Australians building wealth for retirement, superannuation can be an important part of long-term planning.

Concessional contributions can provide a tax-effective way to build retirement savings, although contribution caps and eligibility rules apply. The general concessional contributions cap is currently $30,000 per financial year. Some people may also be able to use unused concessional cap amounts from up to the previous five financial years, subject to eligibility requirements, including the applicable total superannuation balance test.

However, families with substantial investment assets may have considerably more wealth than can practically be moved into superannuation.

This raises an important question: how should wealth outside super be structured?

Personal ownership, trusts and companies may all form part of that discussion. The appropriate approach will depend on much more than tax. Factors can include how much income you need to fund your lifestyle, how easily you need to access capital, your investment strategy, who should ultimately benefit from the assets and how much administrative complexity you are willing to accept.

Superannuation itself also operates within detailed contribution, access and taxation rules. Contribution eligibility, contribution caps and the conditions for accessing benefits can therefore affect how it fits into a broader wealth strategy.

A more complicated structure is not necessarily a better structure. Any potential tax benefit should be weighed against additional accounting, legal and administrative costs, as well as the restrictions the structure may create.

Think About the Next Generation Early

For families with significant wealth, structuring is not only about today's investment returns or tax position. It can also become an important part of estate and succession planning.

Assets held personally may ultimately pass according to the owner's estate plan and the legal ownership arrangements in place. Assets held within companies and trusts can raise different succession issues because the entity may continue to own the underlying investments even when control or ownership interests change.

Superannuation also requires separate consideration. Super benefits do not automatically form part of a person's estate, and specific rules govern how death benefits can be paid and who may receive them.

None of this means that a trust, company or superannuation structure automatically solves estate-planning problems. Each can introduce its own legal, taxation and administrative complexities. What appropriate structuring can provide is a clearer framework for how wealth is owned, controlled and potentially transferred over time.

These issues can become particularly important following a major financial event, such as selling a business, receiving an inheritance, retiring or beginning to plan the transfer of wealth to children or grandchildren.

Ideally, these conversations happen before decisions become urgent. Financial advisers, accountants and estate-planning lawyers may each have a role because investment, taxation, retirement and estate-planning decisions frequently overlap.

Ultimately, building wealth is only part of the challenge. The next step is considering a structure that allows that wealth to remain appropriately invested, support your lifestyle and, if that is your intention, benefit future generations.

The key question is not simply, “What should I invest in?” It is also, “What is an appropriate way to own those investments given my circumstances?”

A note on current figures: Tax and superannuation rules and thresholds can change regularly. Figures or strategies discussed in older presentations, articles or videos should therefore not automatically be treated as current. Before implementing a strategy, current tax rates, contribution caps, eligibility requirements and other relevant legislation should be confirmed.

The information provided in this article is general in nature and has been prepared without considering your personal objectives, financial situation or needs. It does not constitute personal financial, tax or legal advice. Before making financial decisions, consider whether the information is appropriate for your circumstances and seek professional advice where required. Where a financial product is involved, consider the relevant Product Disclosure Statement and other applicable disclosure documents before making a decision.