Why Do I Need to Create An Investment Structure?
Simply put, an investment structure refers to the way your investments are legally owned.
Whether you purchase one or multiple assets, it is important to consider the best investment structure to use. It's also imperative that you take the time to review all of the investment structure options before making a decision.
There are four basic types of investment structure, individual's, partnerships, companies and trusts. Let's take a look at the advantages and disadvantages for each.
A lot of people choose to hold their assets in their individual name or the name of their spouse or jointly. This is by far the easiest and lowest cost structure and the structure with the least amount of paperwork. The individual option is more tax effective, especially if the investment is negatively geared. The biggest risk associated with personal ownership route is there is little flexibility with the distribution of income and personal liability.
Like the personal ownership set up, the partnership option is simple and cost effective. A partnership is a separate entity for taxation purposes as opposed to holding an investment in joint names. There is little flexibility when it comes to distribution, as the income needs to be split according to partnership agreement.
The biggest disadvantage when it comes to the partnership model is there is no risk protection. In short, this means that one partner could become personally liable for all the debts of the entire partnership, which could be disastrous.
A company is a separate legal entity with steep setup and compliance costs. This structure is mostly used for business rather than investing purposes. The biggest benefits of this option is the tax rate on profits of 30%, which is significantly less than the maximum personal marginal tax rate of 45% plus Medicare Levy. Moreover, there is more protection for shareholders if the business fails or is sued.
This structure isn't without its disadvantages, including high setup costs and risk when it comes to business and personal investments to be owned within the one structure. Plus, one is not able to obtain the benefit of any capital gains discount on the sale of investments.
Trusts are the most popular and effective way to hold investments. A trust is a separate investment structure and assets are controlled by one or more persons (the trustee/s) on behalf of a group of other persons (the beneficiaries). The two most popular trusts are Discretionary and Fixed because they are tax effective, protect assets and include estate planning. Like the company ownership, set up is often complicated and comes with a high cost attached.
The bottom line is setting up a investment structure has its advantages and disadvantages, so it's important that you seek professional advice before deciding which structure is for you.
At BDH Leaders, we advise you on the best structure for your investments. View more information on our business services here.