Think outside of the box – investment company

Harry and Emma are migrant doctors in their late 30. They have no family and relatives in Australia.

They are keen to start their investment portfolio in shares and ETF.

Most advisers will probably recommend a trust structure despite there being no lower tax bracket beneficiaries or individual name to invest and create wealth.

We, however, believe they shall use a company structure to invest considering both are in the highest tax bracket. Treat the company as a second super fund except with no strings attached, i.e., ease of pulling out money from the investment company. 

The reasons are as follows:

• Snowball effect

Companies pay a flat corporate tax rate 30%, which means more after-tax dollars/capital to reinvest and grow the investment portfolio.

• Tax Refund

There is a possibility of clawing back franking credits (tax paid) in the future when declaring dividends to lower tax bracket beneficiaries or when they have retired.

Suppose they retired today and have no other income except pension (tax free) from their SMSF. We declare $30,000 dividends with $12,857 franking credits to each of them. They will receive a tax refund of $8,780 ($12,857 franking credit – $5,178 tax + $1,101 low-income tax offset) from ATO.

• Helping children

They can sell partial of their investment portfolio in the company and stream dividends to their children, helping them to have a foothold in the overpriced property market.

• Inter-generational wealth transfer

Their children can take over the directorship role of the investment company from them when the time comes.

Drawbacks

1. No 50% capital gains tax discount for investments held longer than a year but a flat corporate tax rate.
2. Political uncertainty. If Labour Party will revisit and try to abolish the franking system in the future. After the 2019 election, Labour Party promised not to abolish the franking system.