DFK Richard Hill has lost count of the times it has been asked, “What is the best structure for me?” Going forward, the answer is in two parts.
I) For the operation of a business, a company is the best structure because
- Benefits of limited liability.
- Concessional (deferred) tax rate, currently 26% for small companies (up to $50m revenue).
- Machinery of Corporations Law to govern company administration, governance, change of shareholdings, bank borrowings, etc.
II) For the acquisition of an investment including shares in the business entity, the clear answer is a Discretionary (Family) Trust.
The reasons for this are fourfold
- A Discretionary Trust does not pay any tax itself. it must distribute all annual taxable income to eligible beneficiaries. Such beneficiaries pay tax as an additional tax at their appropriate rate.
- Annual distribution of profits can be changed within family members from year to year (i.e. discretionary).
- Capital gains derived from Trust Investments are distributed as well but beneficiaries are entitled to their share of the 50% capital gains tax.
- Companies enjoy a short-term benefit as an investment vehicle, currently 26% for smaller companies (up to $50m turnover) but profits not distributed annually (no requirement to do so) remain in the company but must be ultimately distributed to shareholders who must pay the difference between the company rate (26%) and their marginal rate. Importantly, the company does not enjoy the 50% capital gains discount on the ultimate sale.
The fundamental rule is that companies should never be used for the purchase of any asset where it is likely to have capital gains (appreciating assets such as shares, property, etc).