When investing in, or purchasing, an asset or investment, one big question that needs to be answered is "Who is the owner?". For many of us, the simplest approach to answer this question is to simply own the asset in our names. But often times this may not be the most effective ownership structure. One of the key considerations when deciding on an ownership structure will be the overall tax implications.
Tax Structures
There are a number of common structures used to hold investments and these come with different tax consequences.
| Structures | Tax Consequences | Other Consequences |
| Individual Names |
Earnings taxed at marginal tax rate (up to 46.5%) Capital gains taxed at marginal tax rate (50% discount for assets held longer than 12 months) |
Asset not protected from creditors Forms part of estate assets |
| Joint Names |
Earnings (split 50:50) taxed at marginal tax rate (up to 46.5%) Capital gains (split 50:50) taxed at marginal tax rate (50% discount for assets held longer than 12 months) |
Asset not protected from creditors Not an estate asset |
| Share (Tenants in Common) |
Earnings (fixed split) taxed at marginal tax rate (up to 46.5%) Capital gains (fixed split) taxed at marginal tax rate (50% discount for assets held longer than 12 months) |
Asset not protected from creditors Forms part of estate assets |
| Family Trust/Unit Trust |
Earnings (possibility for effective splitting) taxed at marginal tax rate (up to 46.5%) Capital gains taxed at marginal tax rate (50% discount for assets held longer than 12 months) Withdrawals back out to your own name are tax-free |
Asset protected from creditors Not an estate asset |
| Company |
Earnings taxed at corporate tax rate (30%) Capital gains taxed at corporate tax rate (no discount on assets held longer than 12 months) Withdrawals back out to your own name are taxable, less franking credits |
Some protection from creditors Not an estate asset |
| Insurance/Investment Bond |
Earnings taxed at corporate tax rate (30%) Capital gains taxed at corporate tax rate (no discount on assets held longer than 12 months) Withdrawals back out to your own name are tax-free after 10 years (contribution rule applies) |
Asset protected from creditors Not an estate asset |
| Superannuation - Accumulation |
Earnings taxed at super tax rate (15%) Capital gains taxed at super tax rate (33.3% discount for assets held longer than 12 months) Withdrawals back out to your own name are tax-free after age 60 |
Asset protected from creditors Not an estate asset Tax concessions for contributions available Restrictions on withdrawals and contributions |
| Superannuation - Pension |
No tax on earnings (0%) No tax on capital gains Withdrawals back out to your own name are tax-free after age 60 |
Asset protected from creditors Not an estate asset Restrictions on withdrawals and contributions |
As shown above, tax rates applied to investment earnings can range from the top marginal tax rate of 46.5% all the way down to the tax-free environment enjoyed by pension assets. In order to minimise tax going forward it is first necessary to understand your current marginal tax rate and likely future marginal tax rate, as well of those applied to your spouse and beneficiaries.
If you are a high income earner, structuring assets so that income is split with a lower income earning spouse or child, is a possible strategy. A family trust can be good in this regards, especially in order to maintain flexibility going forward. This may also be more attractive for younger workers with high incomes, due to the restrictive nature of superannuation (e.g. can't touch until you retire).
Alternatively, investments with tax deductions (e.g. interest deductions from gearing, depreciation deductions on property) may actually be best held in the name of a high income earner, so that deductions are offsetting higher-taxed income.
Taking advantage of the low tax rates offered within superannuation will be the primary strategy for most long-term assets. But housing your assets in a combination of superannuation and other structures can yield a more suitable investment outcome overall.