Introduction: is the orthodoxy correct?

Most accountants do not recommend owning growth assets in companies. They prefer individuals, trusts or SMSFs. This is because  individuals and trusts enjoy a 50% CGT discount and SMSFs enjoy a 33.3% CGT discount on assets owned for more than 12 months.

This may not be wise advice.

It may be better to instead own growth assets in a private company with the shares owned by a family trust, pay tax on income and capital gains at the company tax rate of 30%, and then pay out a fully franked dividend in a later year to a low or no tax beneficiary who can claim a credit/refund for all or part of the tax previously paid by the company.

It is quite probable that this structure will lead to less tax being paid in the long run.

This is because the real rate of tax, ie the 30% tax paid now less the (indeterminate) tax refund later will be less than otherwise will be the case. In some cases it can be close to zero, and certainly less than the 15%/10% tax rate paid by a SMSF.

The position is diagrammed here:

investment-portfolio  

Long term holding period

Ultimately the tax effect of this structure depends on unknown future variables. Its not possible to be 100% certain or confident that it will produce the best possible tax outcome because we do not know what will happen in the future, to either asset values or the tax profiles of the family trust’s beneficiaries. However, for most clients it is probable, but not certain, that this structure will minimize the long term real rate of tax, net of franking credit refunds, particularly on concessionally taxed investments such as franked shares.

Company tax is the best tax

This highlights the importance of paying tax at the company level, if at all possible. If you pay tax at the company level, rather than the individual level, you live to fight another day. The tax is not a final non-refundable payment. Its an installment, with a credit or even a 100% refund some time down the track, depending on your family’s future tax profile.   

Further relevant reading

You can read further on tax efficient investing here: The Dover Way. Tax Efficient Investing.

You can read further on tax planning for financial planners here: The Dover Way. Tax Planning for Financial Planners.

Table summarizing the ownership options

Table summarising different legal structures Sole owner Partnership of Individuals Partnership of Trusts Discretionary Trust Hybrid Trust with a company as a beneficiary Unit Trust Company with individual shareholders Company with discretionary trust shareholder
Ability to defer tax under franking credit protocols, and limit current year tax to 30% No No Yes, if the trust has a company as a beneficiary Yes, if the trust has a company as a beneficiary Yes, if the trust has a company as a beneficiary Yes, if the trust has a company as a beneficiary Yes Yes
Income sharing capability No No Yes Yes Yes No No Yes
Offset losses against other income from external activity Yes Yes No No No No No No
Amenable with other tax planning strategies Low Low High High High Moderate Low-medium Moderate
Organisational complexity Low Moderate High Moderate Moderate Moderate Moderate High
Cost to set up and run Low Moderate High Moderate Moderate Moderate Moderate High
CGT 50% discount Yes Yes Yes Yes Yes Yes No No
CGT active asset exemption Yes Yes Yes Yes Yes ( 20% income & capital test) Yes, but cost base reduced Yes Yes
CGT retirement concession Yes Yes Yes Yes Yes ( 20% income & capital test) Yes Yes Yes, subject to conditions
CGT 15 year concession Yes Yes Yes Yes Yes Yes Yes Yes, subject to conditions
CGT small business rollover Yes Yes Yes Yes Yes Yes Yes Yes
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