Tax and investment structures explained

Tax and investment structuring is vital for long-term wealth creation, wealth protection and tax optimisation in Australia. Getting the right structures in place now could save you hundreds, or even millions, of dollars in years to come. This guide explores all types of structures, including:

• Individual tax

• Companies

• Bucket companies

• Family trusts

• SMSFs

• Superannuation

• Jointly held assets

• Testamentary trusts

• Investment bonds

Disclaimer

The information in this guide is general in nature and does not take into account your personal objectives, financial situation or needs. It is intended to provide a broad summary of common ownership structures and general considerations. Structuring strategies can have complex tax, legal and financial implications, and should be considered carefully. You should seek independent professional advice from a qualified accountant, financial adviser, and legal professional before making decisions or implementing any structure. Let us know if our advisers can help - because this is the stuff we love doing!

What is structuring?

Structuring is the foundation of a holistic financial plan and strategy to grow (or preserve) your wealth. Structuring refers to how you own and control your assets, whether in your personal name, shared with someone else ("joint"), or held via a separate entity such as a company, trust, or super fund. The right structure can provide better protection for your wealth, improve tax outcomes and support your long-term goals.

There is no one-size-fits-all approach. What's right for you is probably not the same as what's right for me, for example.

The best structure for you will depend on your situation and consider things such as family, risk profile, estate planning, existing wealth and ability to generate and pass on future wealth. 

How to get advice on tax & investment structures

How to set up structures and get tax and investment advice is important. To do that, it's important to know who can provide you with the right structuring advice. 

In general, there are two types of structuring and planning professionals:

1. Your tax agent/accountant - registered with the ATO, these are the professionals who do your tax return. Typically charging by the hour (e.g. $350 per hour) or by project (e.g. $4,000 to set up a family trust with corporate trustee) your tax agent is most commonly responsible for completing your tax returns, assessing what can be claimed as a tax deduction for your situation or structure, administering your structure (e.g. SMSF reporting, family trust reporting, etc.) and helping you understand the exact tax bills you will face as a result of your decisions.

2. A tax (financial) adviser - just like our team, these people are financial advisers who have specialist qualifications in tax planning, optimisation and structuring (you can check their qualifications on the ASIC/Moneysmart Financial Adviser Register). A tax (financial) adviser works with you and your accountant but, typically, considers all of your financial situation and goals to make an informed decision on what structures could be used at certain times, the pros and cons of each structure in your situation and investments, and considers the tax optimisation across entities. It's important to remember, these people are financial advisers, not tax agents. They work at the highest level of tax optimisation and long-term planning. So they will rely on your accountant to do the numbers on the tax returns, determine any tax deductions that may apply, and (often) how your business is performing month-to-month. 

Types of Structures

In Australia, there are four main types of structures commonly used:

Individual (or Joint) ownership structure

Individual (or joint) is the simplest way to own an asset - in your own name, or held jointly with another person (or many people in a Partnership). In this structure, each individual is personally accountable for the income and expenses.

Most people we work with will hold shares and ETFs in their own name, which is fine for smaller amounts of money. However, holding too much capital in your own name can be a mistake if you might face business or legal risks, expect to move into a higher tax bracket over time, or if you'll ever need more flexibility in terms of tax/income planning. Keep reading, then get the right advice - early.

Key benefits of individual structuring

• Simplicity: It’s the easiest and cheapest structure to set up and maintain.

• No additional tax return: Individual and jointly earned income is reported through your personal tax return.

• Control: You retain direct control over the assets and income.

• Tax effective at lower incomes: Holding assets personally means you pay tax on income at personal income tax rates, which is tax-effective when earning little income.

Key risks of individual structuring

• Tax rates: All income and capital gains are taxed at your marginal tax rate - which may be high if you earn an above-average salary and have additional investment returns.

• No ability to defer tax: Income and capital gains are taxed as they are earned each year.

• Asset protection: There is no protection from creditors or legal claims when owning assets personally (important for business owners or professionals who consider public liability).

• Estate planning: If held solely, assets will pass through your Will, or the laws of intestacy if you die without a Will.

  • Joint ownership can be structured as joint tenants (where the asset passes to the surviving owner), or tenants in common (where your share passes according to your will). This has important implications for estate planning and should be considered carefully.

Common Terms

• Marginal Tax Rate: The percentage of tax you pay on each additional dollar of income (increases with your income level).

• Joint Tenants: A form of joint ownership where both owners have equal rights to the entire asset, and it automatically passes to the surviving owner (such as a spouse) upon death.

• Tenants in Common: A form of joint ownership where each owner holds a defined share (e.g. 50/50, 75/25), which can be passed through a will.

Company structure

A company is a separate legal entity that can own assets and earn income. Shareholders are the individuals who benefit from the company, and directors are responsible for the operation of the company, including decisions on distribution of capital and income.

Key benefits of company structures

• Tax benefits: Profits are taxed at a flat corporate rate - 25% for most operating companies, or 30% for companies only generating passive income (e.g. bucket companies, consultants, etc.).

• Retained earnings: Net Profits can be held within the company to re-invest for the future, or be distributed at a future time when it is more tax-effective.

• Franking credits: Dividends distributed to shareholders come with franking credits that ensures profits aren’t taxed twice, potentially reducing personal income tax.

• Limited liability: Shareholders personal assets are typically protected from liabilities the business incurs.

Key risks of company structures

• Loans to related parties: There are specific provisions to limit the benefits achieved through lending to related parties such as shareholders known as Division 7A loans.

• Division 7A: These rules prevent shareholders or associates from accessing company funds without proper planning. If not managed correctly, unintended tax may be realised.

• No CGT discount: Unlike trusts and individuals, companies are not entitled to the 50% capital gains discount when realising capital gains held for more than 12 months.

• Complexity: Requires ASIC registration, company tax returns, annual financial statements. Expect $1,000 - $2,000 per year in extra admin costs.

• Personal Services Income (PSI): If you're a doctor, lawyer, architect, engineer or consultant, you should know be aware of that PSI rules will reduce the tax benefits of a company structure, especially if the income is mainly by personal effort. For example, a doctor or engineer consulting on a project and invoicing $500,000 via their company is likely to pay more than 30% tax rates. PSI is an ATO provision to stop high-income earning business owners from effectively operating as sole traders but with the capped company tax rate.

• Limited discretion on dividend payments: Dividends must be paid equally and proportionately across shareholders (holding the same class of shares), offering less discretion than family trusts.

Common Terms

• Director: Oversees company strategy and acts in shareholders' best interests.

• Shareholder: Owns company shares, entitled to profits (dividends)

• Franking Credits: Tax credits on dividends from Australian companies that have paid tax.

• Retained Earnings: After-tax company profits held in the business for re-investment.

• Dividends: Distribution of company profits to shareholders.

• Trust

Structuring with trusts (e.g. family or unit trusts)

A trust is a legal structure where a trustee holds and manages assets on behalf (“on trust”) of beneficiaries. Trusts can be discretionary (where the trustee decides who gets what each year), or fixed (beneficiaries have fixed entitlements, e.g. unit trusts). Trusts are extremely common in financial planning, but also in business.

Key benefits of trusts

• Income streaming: With a trust you can distribute income among family members/beneficiaries in lower tax brackets to reduce overall tax.

• Asset protection: Assets held in trust may be protected from personal/company creditors.

• Estate planning: Trusts can be useful for controlling how assets are passed across generations.

• Control: Allows one person (the trustee) to control assets without owning the assets outright.

• CGT Discounts: Assets held for over 12 months may be eligible for the 50% CGT discount, unlike a company structure.

Key risks of Trusts

• Set-up & maintenance: Setting up and maintaining a trust may require legal or tax advice, including a formal trust deed and annual tax returns, which may reduce its cost-effectiveness for smaller wealth pools. Expect to pay between $2,500 and $5,000 (more complex) just to set one up.

• Distributing income: Income generated within a trust should typically be distributed to beneficiaries, otherwise the trust is taxed at the highest marginal tax rate. A "bucket company", which is a company capable of paying a 30% tax rate, is common beneficiary amongst Rask clients, business owners and families with larger pools of capital.

• Capital & Income losses: losses incurred (e.g. on investments) can’t be distributed, so can get ‘trapped’ within the trust.

• Control: Consider who acts as a trustee, appointor and beneficiaries, as this can create complications if not established correctly. 

Common Terms

• Discretionary Trust: Commonly called a "family trust", a discretionary trust is where the trustee has the ability to determine how distributions are made to beneficiaries, in what proportion.

• Unit Trust: This is a fixed trust where beneficiaries hold “units of entitlement”. Beneficiaries receive distributions in proportion of their unit holding of the whole trust.

• Appointor: Has the power to appoint or remove trustees.

• Trustee: Manages the trust assets and makes distributions according to the trust deed.

• Corporate Trustee: A company appointed as trustee of a trust. This structure is slightly more expensive to start up, but it offers limited liability, simplifies asset ownership and improves succession planning. We typically recommend this structure for business owners. The corporate trustee (e.g. Example Pty Ltd) will typically have a sole director who controls the trustee company, and in turn controls the trust.

• Beneficiary: People, other companies or other trusts can be beneficiaries of a trust. They receive the benefits of the trust, such as income or capital distributions. See next point.

• Corporate Beneficiary: Often called a "bucket company", this is a company that is a beneficiary of a trust. A bucket company is often used for tax planning purposes when the other beneficiaries (e.g. a husband and wife duo) have a tax rate higher than 30% - thus, it may make sense to send (distribute) some income to the company each year. From there, it can be reinvested for more growth.

• Trust Deed: The trust deed is the source of truth as to how the trust can operate - including who it can distribute to, what assets it can hold and what its intended purpose is.

Superannuation as a structure

Superannuation is a tax-advantaged structure designed to help Australians save for retirement. Contributions into superannuation are generally locked away until you meet a condition of release such as retirement. Superannuation operates as a trust at its core, although Super is governed by its own legislation and regulations, making it distinct from other trust structures. See our guide on making tax effective contributions to Super.

Key benefits of Super

• Tax benefits: Contributions into superannuation can be tax-deductible, and investment earnings/returns are taxed at only 15% while accumulating (e.g. before retirement), or 0% when in pension phase. This is commonly the most tax-beneficial structure.

• Long-term compounding: Contributing to Super early and consistently, allows you to grow a much larger retirement balance over time. However, like all structures, it's not perfect (see below).

• Estate planning: Superannuation has its own rules and legislation, and can be used to enhance estate planning (e.g. a binding death benefit nomination).

• Options: Most Australians will have an industry Super fund (e.g. Hostplus, AustralianSuper), but increasingly more wealthier and DIY-focused people are switching to self-directed options (e.g. platforms like Netwealth, etc.) to get more control. Self-managed Super funds (SMSFs) provide the most flexibility, especially for business owners, but the benefits are not always clear cut. Get licenced financial advice before establishing an SMSF.

Key risks of Super

• Restricted access: Superannuation has restricted access until a condition of release has been met. You typically can't access it until you retire (though some strategies and exceptions exist).

• Contribution limits: There are annual caps on how much you can contribute to superannuation, including limits that don’t apply to other structures.

• Fund choice: How and where your superannuation is invested plays a significant role in what you have access to in retirement. Nowadays, investment platforms have Superannuation licences (like the tools we use), so that you can invest your Super similar to the way you invest the capital in your regular portfolio.

• Asset flexibility: SMSFs may have a broader range of available options to invest in, however they still come with some restrictions that companies and trusts do not.

Common Terms

• Accumulation phase: The period of superannuation where you are still contributing  and investment earnings are taxed at 15%.

• Pension phase: When you start drawing a retirement income from your super and investment earnings are taxed at 0%.

• Condition of release: Circumstances under which you can legally access super (e.g. ceasing employment after age 60, turning age 65).

Linking structures for better outcomes

For more complex strategies, tax structures are commonly combined or used together to get the best outcome. There is no limit to the number of structures that one individual can employ in their overall financial plan, and it will depend on individual circumstances to determine what is most appropriate.

Why link structures?

There are many reasons you should consider using more than one structure, and linking structures together. Here are some of the reasons to consider linking structures:

1. Income splitting and tax minimisation across entities and family members

2. Asset protection by separating ownership and control

3. Intergenerational wealth transfer 

4. Tax deferral

5. Succession planning

Example structuring: business owners

Ash is a business owner who runs a successful marketing business. After receiving advice, she structures her business using a company as the operating entity, and a discretionary trust as the shareholder (owner) of the company. She also contributes regularly to her superannuation fund to build long-term savings.

This structure allows Ash to:

• Operate the business through a company, limiting her personal liability and accessing the 25% company tax rate.

• Distribute company profits as dividends to the discretionary trust, which then distributes to Ash and other beneficiaries in a tax-efficient strategy.

• Separates ownership and risk - the trust owns the business but Ash retains control as the trustee and director.

• Making regular super contributions helps reduce her personal tax today while building retirement wealth in a low-tax environment (15% on earnings in accumulation phase).

If Ash had operated as a sole trader, all income would be taxed at her marginal tax rate and her personal assets would be exposed to business risk. By streaming the income through multiple structures, she gains flexibility, protection and long-term planning benefits, while reducing tax.

Structuring example: higher net-wealth families

The Rocket family consists of James and Jessie, and their two teenage children, Tom and Jerry. After selling their business and paying the relevant taxes, James and Jessie now hold a significant amount of wealth in their personal names. They are also many years off accessing superannuation, so do not want to lock funds away and reduce their flexibility.

Before investing, they seek out professional accounting, legal and financial advice to set up a discretionary family trust. They list all four family members as beneficiaries, and they also establish a corporate beneficiary ("bucket company") as a fifth beneficiary.

James and Jessie “gift” their investment capital to the trust, allowing it to be managed and invested within the structure. Over time, the trust generates substantial income from these investments.

If all the income were distributed to James and Jessie, it would push them into the top marginal tax rate of 47% (including the Medicare levy). Also, because Tom and Jerry are still minors (kids), most trust income distributed to them would attract penalty tax rates (up to 66%) under the minor beneficiary rules.

To manage this, the family works with their accountant and tax (financial) adviser to distribute the trust earnings strategically:

• Income up to the 32% (including Medicare Levy) to James and Jessie individually

• The remaining income to the bucket company, which pays a flat 30% tax

The retained earnings (profit after tax) in the bucket company can be re-invested or held in cash, to later be distributed as franked dividends when James and Jessie may have lower taxable incomes, allowing them to benefit from franking credits and reduce their personal tax further.

In future years, when Tom and Jerry are adults, they can receive distributions from the trust at normal adult tax rates, providing the family with four adult beneficiaries to split income between.

Additional structures to consider

Testamentary Trusts

A testamentary trust is a type of discretionary trust that is established through a Will and only comes into effect after the death of the Will-maker. It operates much like a standard discretionary/family trust, but with one key advantage: income distributed from a testamentary trust to minor beneficiaries is taxed at adult marginal tax rates. 

This important difference avoids the standard penalty tax rates that are applied to kids/minors earning “unearned income”, potentially creating significant tax savings when income is split across young children or grandchildren. Control of the trust is determined by the Will, making it a powerful tool for estate planning and asset protection, especially in blended families or complex succession situations.

Investment Bonds & Education Bonds

Investment Bonds (also known as Insurance Bonds) are a hybrid between an investment structure and insurance contract. Earnings/returns are taxed at a flat 30% rate (like a company) within the bond, and withdrawals after 10 years are tax-free, provided contribution rules are met. 

Investment bonds are particularly useful for high-income earners who have a long investment horizon, or those who are looking to invest for a child or grandchild in a tax effective, estate-friendly structure. 

Education Bonds operate similarly but have some additional benefits when directly used for education expenses, including the ability to make partial tax-effective withdrawals (e.g. for some schooling costs) without resetting the bond’s 10-year tax-free status.

Let me know if you have any questions, or simply reach out to our expert financial planning team for a free discovery call before proceeding with your plans. Even if you're not a Rask Advice client, we'll try to help.