Wealthy Australians: Is a 30% Tax Company the Next Best Move?

 With proposed changes to Australia’s capital gains tax rules creating uncertainty for investors, many wealthy Australians are reconsidering how they structure their investments. While superannuation remains one of the most tax-effective investment structures available, those who have reached their superannuation limits may need to look at alternative options. 

One structure that could become increasingly attractive is an investment company. 

Why consider an investment company? 

Traditionally, wealthy investors may have invested in their own names or through a family trust. However, proposed changes to the way capital gains and trusts are taxed could alter the relative attractiveness of these structures. 

An investment company generally pays tax at a flat rate of 30%. While this is higher than the tax rate that can apply to superannuation, particularly in retirement, it can be attractive for investors who would otherwise be paying tax at higher personal rates. 

For substantial family wealth held outside superannuation, a company can therefore provide another option worth considering. 

The potential impact of capital gains tax changes 

One of the historical disadvantages of investing through a company has been that companies do not receive the 50% capital gains tax discount available to individuals and some trusts when eligible assets are held for more than 12 months. 

However, proposed changes to capital gains tax could change the way investors view this disadvantage. 

Under the proposed framework discussed in the video, capital gains could be subject to a minimum tax rate of 30%, with tax potentially increasing to 47% depending on the circumstances, alongside an adjustment for indexation or inflation. 

If these changes proceed, the difference between investing through a company and other structures could become less significant, potentially making companies more attractive for certain investors. 

Franking credits can provide another advantage 

Another important feature of Australian companies is the ability to generate franking credits. 

When an investment company pays tax on its income, that tax can potentially contribute to franking credits attached to future dividends paid to shareholders. When those dividends are eventually received personally, the franking credits can help offset the shareholder's tax liability. 

For investors on a personal tax rate of 30% or higher, this can mean they may have little or no additional tax to pay on fully franked dividends, depending on their circumstances. 

Australian shares can also generate franking credits within the company, which may further improve the tax efficiency of the overall structure. 

The flexibility to control when income is distributed 

One of the key benefits of an investment company is the flexibility around when profits are distributed to shareholders. 

If an individual earns investment income personally, that income generally needs to be included in their personal tax return in the year it is earned. 

Family trusts also have distribution requirements. Income generally needs to be distributed to beneficiaries each year, and undistributed trust income can potentially be taxed at the highest marginal tax rate. 

A company provides greater flexibility. For example, if an investment company realises a significant gain in one year but the shareholders are already paying high personal tax rates, the company may retain the after-tax profits rather than distributing them immediately. 

This effectively provides a degree of control over when money moves from the company to individuals. 

It isn't necessarily suitable for everyone 

While investment companies can offer significant advantages, they are not automatically the best structure for every investor. 

The costs and administration involved in establishing and maintaining a company need to be considered. For someone investing a few hundred thousand dollars, these costs may outweigh the potential benefits. 

The structure becomes more relevant when dealing with substantial wealth, particularly for business owners and families with millions of dollars invested outside superannuation. 

There are also important decisions around shareholders, directors, investment strategy and how the company fits into an overall estate and wealth planning strategy. 

Superannuation still comes first 

Despite the potential benefits of an investment company, the key message is that it is not necessarily the best investment vehicle overall. 

Superannuation remains highly attractive because of its concessional tax environment. Once an individual has reached their superannuation limits, however, alternative structures need to be considered. 

For wealthy Australians who have maximised their superannuation and still have substantial assets to invest, an investment company could potentially move higher up the list of structures to consider. 

Looking beyond the investment itself 

When building substantial wealth, choosing the right investments is only part of the equation. The structure holding those investments can have a significant impact on the tax paid today, as well as the tax implications for future generations. 

With proposed tax changes potentially reshaping the relative benefits of personal, trust and company structures, wealthy investors should review their arrangements rather than assuming the structure that worked in the past will remain the most effective. 

For investors with significant wealth outside superannuation, an investment company may become an increasingly attractive option, particularly where the ability to retain profits, manage distributions and make use of franking credits aligns with their broader financial and estate planning objectives. 

As always, the appropriate structure will depend on individual circumstances. Before establishing or restructuring an investment vehicle, it is important to seek professional financial and tax advice.