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Utilising an investment company can offer several advantages for high-income earners and long-term investors, including tax efficiency. In this article we explore the tax and other benefits that are becoming increasingly popular in Australia.

Investment companies should be considered as a means to maximise tax and other benefits for:

• High-income earners (e.g., earning over $180,000 annually

• Property investors seeking asset protection

• Business owners with surplus cash for investment

• Families who want to build wealth for the future and using trusts for wealth distribution
  

What are we referring to by an investment company?

An investment company is a separate legal entity established through incorporation with the Australian Securities and Investments Commission (ASIC). An investment company can attend to many activities and typically would acquire and hold and manage investments—such as property, shares, or other assets—on behalf of its owners (the shareholders).

Companies have an unlimited life whereas discretionary or family trusts have a limited life in many states of Australia, including NSW, so an investment company can be the ultimate long term generational investment vehicle.

Who is involved in an Investment Company?

An investment company must have at least one Director. Director(s) as the name suggests direct or make the decisions for the company. You can have one or more Directors.

An investment company must have shareholders who are the owners of the company. You can have one or many shareholders.

A Public Officer is appointed who usually signs the tax return and communicates with the ATO.

Key Tax Advantages of an Investment Company

• Lower Corporate Tax Rates: Australian resident companies classified as base rate entities (with a turnover under $50 million) benefit from a reduced corporate tax rate of 25%, compared to the top personal marginal tax rate of 47%, including the Medicare levy.
  

• Income Accumulation and Deferral of payment of tax: Companies can accumulate profits and defer dividends, allowing investors to control when income is taxed to shareholders who receive dividends. This approach provides for the smoothing of income across financial years, providing advantages such as planning for retirement or other life events.

• Franking Credits on Dividends: When profits are distributed as dividends, shareholders receive franking credits—a tax offset for corporate tax already paid. This advantage is known as the Imputation System. Australia is one of only a handful of countries which introduced this system, so you should seriously consider taking advantage of it. This reduces double taxation and can be particularly beneficial for retirees or low-income shareholders.

• Asset Protection: Holding investments in a company can shield personal assets from business liabilities or legal claims. This separation is crucial for professionals and entrepreneurs seeking risk mitigation.

• Capital Gains Management: While companies don’t receive the 50% CGT discount available to individuals, they can strategically manage capital gains through timing and reinvestment. Additionally, losses can be carried forward to offset future gains.

• Strategic Planning of ownership of an Investment Company: There are several strategies that you can utilise to provide flexibility to share profits (retained earnings) amongst family members or business partners. These include creating different classes of shares such as Ordinary shares, “A“ Class, “B” Class, income only shares, income and capital shares. Each class can have different voting rights, so control of the company can be tailored to specific ownership and control objectives. Then when the Director(s) want to pay dividends they can tailor these distributions having regard to which shareholder would get the maximum benefit from income and or franking credits that may be available.

Additional Considerations

• Compliance and Setup Costs: Companies require formal registration, annual reporting, and tax returns. These costs are offset by the long-term tax savings and strategic flexibility they offer. We are more than happy to provide a competitive quote. Please ask us.
  

• Bucket Companies for Trusts: Investment companies are often used as bucket companies to receive trust distributions, capping tax at the corporate rate and allowing reinvestment or deferred personal taxation.

• Superannuation Integration: Investment companies can complement SMSFs and other retirement strategies, offering a tax-efficient vehicle for building wealth over time.
  

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