While superannuation remains an excellent investment, unfortunately, the contribution rules don’t always reward those who have started later in life. Many professionals don’t come into surplus savings capacity until later in life, and the superannuation contribution rules restrict the ability of these people to catch up.
Further, these professionals often have a limited working life, and while they will earn more, they have a limited period of time to store the wealth away. Currently, superannuation access for many younger professionals is at age 60. There is no disputing that there is a very real risk that Governments may push out the age for access to age 65 or later in future years. Enter two very real and efficient strategies – the first we are discussing this week – the Investment Company concept.
We are using a strategy with some families to establish a company and have the family lend monies to the company. The monies in the investment company are then invested. The monies are retained in the company, given companies are allowed to retain their earnings. There are a range of investments, but generally, you are looking for good growth and, if possible tax-effective income streams (franked dividends from investing in Australian shares are very attractive in these companies). The investment company pays tax on the earnings from the company’s investments at 30%. This is still lower than the 39% tax rate for people who earn greater than $120,000 or 47% for people who earn greater than $180,000!
Once these people retire, and it can be at any time given preservation ages like superannuation do not restrict you, you can start accessing the capital from the investment company. Because the monies have been loaned to the company, the funds drawn can be taken tax-free and applied against the loan account that was established at the time when the monies were loaned in. The income can be further “turbo charged” by having the company pay out a fully franked dividend. A person with no real taxable income would receive the dividend and receive the franking credits back from the government, given they have no taxable income to offset these against. For example, an individual receiving a $60,000 dividend would receive a tax refund of $6,755 and, for a couple – $13,510.
The Investment Company also offers an asset protection company for people who are running their business through a Trading Company. We often look to create an Investment Company and pass the excess profits from the Trading Company to the investment Company as a fully franked dividend. This means we are keeping the Trading Company stripped of assets in the event of litigation while building up assets that once again will provide a second source of income.
While superannuation is certainly the most tax-effective strategy, the Investment Company strategy warrants investigation for higher-income earning professionals.
General Advice Warning – this communication is for discussion purposes only and should not be acted upon. Your circumstances may differ significantly from the examples presented. For that reason, you should seek advice before commencing any strategy.
Future Gen Solutions provide forward thinking, holistic advice and personalised support for every stage of life. Our focus is what’s important to you by developing a dynamic strategy tailored to your unique situation.