Investment companies a better alternative to family trusts

Investment companies present an alternative for family trusts, when it comes to planning alongside superannuation for high net worth clients, according to HLB Mann Judd.

Michael Hutton, HLB Mann Judd partner, said investment companies could be used to house and invest family wealth.

“One of the things we’re talking to our wealthier clients about is using it as an alternative structure in addition to superannuation,” Hutton said.

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“The benefit there is you’re not limited by contribution limits, a family can loan money into the company and then have that company invest money from them and earn income on those investments.

“It’s taxed at the company rate of 30%, rather than perhaps the top marginal tax rate if they were to invest that money in their own name.

“That’s not as good as superannuation, which is why it should be part of the strategy and perhaps the major part of the strategy.”

For that reason, Hutton said investment companies had come into play more often with discussions with wealthier clients.

“Where they’re not able to draw enough from their super because they didn’t build it up enough, they can draw down on the investment portfolio and effectively they’re drawing down on a loan account so there’s no tax payable,” Hutton said.

“They can pay dividends out of that to themselves as these would come out as franked dividends.

“It doesn’t have to declare a dividend each year, it doesn’t have to pay out profits, which is different to a family trust, so were finding that to be a flexible way to go.

“It’s also perpetual and can continue on past the death of the shareholders, whereas a super fund cannot.”

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I thought the biggest problem with companies as an investment vehicle is they don't qualify for the 50% CGT exemption individual investors or family trust beneficiaries receive. And the 30% tax rate is a bit of a furphy, because tax is effectively adjusted up or down to the recipient's marginal rate (less franking credit for the 30% company tax) when dividends are paid. What am I missing?

You're aren't missing anything, he has conveniently ignored the loss of the 50% exemption. But it does suit the accountants to have more entities to administer! Why not use a good old fashion insurance bond? If it's such a long term structure they are referring to. I've run Insurance bonds by accountants as an alternative to bucket companies many times - but they don't like them as there is no fee involved for them.

only benefits are retained earnings that are gradually drawn in retirement once you are in a lower tax bracket

I think the ability to leave profits in the company for several years (until needed) is worthwhile, but as Bozo says, this also applies to insurance bonds. Getting franking credits out may be worthwhile for some.

Or you could have a company as beneficiary of a family trust so you can continue to distribute capital gains directly to beneficiaries (to obtain CGT discount) and any income not required to the company. Family Trust can hold the growth assets and as funds build up in the company these can be used to invest in the income orientated investments (not requiring the CGT discount) benefitting from the lower tax rate....

You need both if you're going to do it. Growth assets in a company dont make sense unless you're short term trading.

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