Which Investment Vehicle is Best to Build Wealth?
With the ongoing discussions about how the wealthy invest, a frequently asked question is: which entity is best for building wealth? The most common vehicles for wealth accumulation include superannuation, discretionary or family trusts, and investment companies. The choice is typically driven by taxation considerations, with each option offering a unique tax framework.
Tax Treatments
Superannuation has long been considered the most tax-effective investment vehicle. However, additional taxes on contributions for high-income earners and proposed taxes on incomes from super balances above $3 million may challenge this perception.
For investments using after-tax money, taxation rates vary:
Super Funds: Income is taxed at 15%.
Investment Companies: Income is taxed at 30%.
Family Trusts: Income is subject to marginal tax rates depending on the beneficiary of the trust distributions.
Capital gains tax (CGT) treatments also differ:
Super Funds: Eligible for a one-third discount on assets held for over 12 months.
Investment Companies: Not eligible for any CGT discount.
Family Trusts: Typically, a 50% CGT discount flows to the trust's beneficiary.
Implications for Funding Retirement
When withdrawing funds during retirement, each investment entity offers a different tax scenario:
Superannuation: Withdrawals are tax-free if you're over 60 and retired, with no withdrawal limits. Income tax drops to 0% for balances up to $1.9 million. For balances over $1.9 million, income is taxed at 15%, and earnings on balances over $3 million will face an additional 15% tax.
Investment Companies: Retirees can withdraw money through dividends, which can be franked dividends, beneficially taxed if the retiree has no other income.
Family Trusts: Depending on the trust's structure (loaned or gifted funds), withdrawals may not be taxed, though beneficiaries could be taxed if assets are redeemed to fund the withdrawal.
Other Considerations
Superannuation offers significant tax advantages, especially for balances below $3 million, while investment companies provide tax benefits for larger asset balances. Family trusts allow the streaming of taxable income and capital gains to different beneficiaries each tax year, offering flexibility.
However, superannuation restricts immediate access to funds, which can be a concern if future changes to preservation rules occur. Beyond tax considerations, asset protection and flexibility are crucial for some investors. The nature of the underlying investment also plays a role in determining the best investment entity.
Ultimately, a case-by-case analysis is necessary to determine the best entity structure to build wealth, tailored to each investor’s individual needs.
