The stock market is a significant investment source for many business-orientated families. While the family business could have been a creator of wealth the stock market is seen by many as a great long-term store of wealth.
While the decision to invest in the stock market – be it through an online platform, a stockbroker or an investment advisor – is significant – understanding the tax treatment of the different entity mixes can make a significant impact on your after-tax return.
There are four different entity types and these are the tax outcomes.
Personal names
If you invest personally the dividend income will sit on top of your other income. And if you are on a lower taxable income this could be the best investment structure (tax wise) for you.
The tax paid by the company will be passed onto you as a tax reduction/refund for most ordinary investors. For share investors who are trading regularly in shares the franking credits can be at risk.
If you sell the shares the capital profit on the sale will be taxed on top of your existing taxable income. If you held the shares for more than 12 months tax is payable on only 50% of the gains (there is an exception for high volume share traders).
Companies
Companies enjoy a lower tax rate of 30% (or even 25% in limited circumstances) for dividend income. The company structure can be a very tax effective option for middle and higher income earners:
- Franked dividends are effectively tax free due to the franking credits.
- Unfranked dividends are usually taxed at 30%.
- Capital gains tax usually taxed at 30%.
The tax strategy of extracting wealth out of the company needs careful tax advice as there is normally additional “top up” tax on the extraction. We often work with clients on structuring their affairs and the timing of dividend payments from companies long term to ensure a better after tax outcome.
Trusts
A trust is essentially not taxed. It is a tax conduit vehicle where the tax burden is passed through the trust and onto another person (like a company or individual).
Trusts are tax effective as they offer flexibility. However the flexibility of trusts also gives rise to tax complexity and ongoing tax obligations that require tax advice and thought.
If you are considering using a trust please contact us. They are more complex and require considered tax advice.
Superannuation
The sole purpose of investing through your superannuation fund is to fund your retirement. So if you are considering this option (through an APRA fund or a self managed superannuation fund) you must consider the tax restrictions on accessing funds early prior to your retirement.
The major tax benefit of superannuation funds is that the tax rate ranges from 0% to 15% depending on the tax profile of the shares, the age of the member when the income is generated and also the value of the superannuation fund balance at the time.
If you manage a SMSF the person regulating the SMSF is the Australian Tax Office and the primary communication point is the tax agent managing the tax strategy and tax advisory piece for your SMSF (followed by the SMSF auditor).
Importantly SMSFs are not the only way you can invest in shares through a superannuation fund. There is a lot of choice out there so talk to a stockbroker, financial planner or investment advisor on the different options that are right for you.
Regardless of what entity you structure your ASX share portfolio through each individual share, and each individual share purchase, is considered separately by the ATO. Likewise each dividend, ETF distribution and buy or sale creates separate tax events and a separate tax profile. The careful tax strategy and tax advisory work on a stock market return makes a significant difference to a families share market activities.
Our team at Westcourt are avid followers of the stock market. And while we don’t give share tips (we leave that to our clients, financial planners and stockbrokers) we can provide enlightened tax strategy advise on the long-term structuring of your affairs to give your family the best after tax return possible – so please give us a call on how to structure and plan for your share portfolio.
