What is the best tax structure to hold investments?

In short, it depends on the circumstances.

Historically, advisers typically recommended a discretionary trust to their clients for passive investments. However, as the result of a number of significant changes affecting the taxation of trusts in recent years, consideration should now be given to using a company as an alternative investment structure.

While the tax rules affecting trusts and companies are complex and a detailed explanation is outside the scope of this article, it is helpful to have some understanding of the implications involving the common practice of distributing trust income to a family company beneficiary at the company tax rate of 30 cents (for passive entities). In summary, where the trust distribution remains unpaid (referred to as an unpaid present entitlement or UPE), the corporate beneficiary is treated as providing a loan to the trust which may be deemed be an unfranked dividend paid by the company and result in additional tax to its shareholders, unless one of the following exemptions is applicable:

-          The UPE is put onto a complying loan arrangement (principal and interest), or

-          The trust sets aside the UPE for the exclusive benefit of the corporate beneficiary

In practical terms, a deemed unfranked dividend results in a higher taxation liability and potentially penalties.

Factors to consider when choosing a structure to hold passive investments should include:

-          Classes of investments assets (shares, property, cash etc)

-          Character of investment income (dividends, capital gains, interest etc)

-          Timing and amount of distributions of investment income

-          ATO compliance issues

-          Family circumstances

-          Estate planning and/or exit strategy

-          Taxation including the company and individual tax rates

In summary, the choice of investment structure requires an understanding of the family’s circumstances and relevant tax rules. The advantages and disadvantages of each type of investment structure should be considered together with professional advice to ensure that the choice of structure is most appropriate for your needs now and into the future.

If you have any questions about how to structure your investments, please feel free to contact John or Renee at DBS Accountants and Business Advisers.