In February 2021 I wrote an article titled “An investment company can be a smart strategy for high income earners”, where I spoke about the use of companies as a preference to superannuation given the superannuation contribution caps are quickly reached. At that point, the second vehicle for investing was the family trust given the flexibility trustees had to distribute monies to a wide range of beneficiaries at lower tax rates.
Since then the ATO have set about tightening the way family trusts distribute income and capital. This has led to increased interest in the use of personal investment companies as an alternative to the family trust. The benefit of companies is the ability to create and issue various types of shares in addition to ordinary shares. These shares can be issued to various family members for instance entitling them to no other rights except for the receipt of dividends. Further dividends can be declared at any time and for the different types of shares on issue. Even when dividends are declared they don’t necessarily have to be paid out and can be retained in the company for the shareholder’s loan account.
Moving away from dividends, companies also have the flexibility to not have to declare dividends at all and to choose to retain the profits from their investments in cash or to reinvest. Note that family trusts are required to distribute the income and capital returns out to beneficiaries. Companies are entities in their own right and accordingly pay tax whereas family trusts hold assets in trust for beneficiaries and are not taxed, rather the income must flow through them to the beneficiaries who are taxed at their own marginal rates.
The point I am making is that the ability to retain profits can really turbocharge the accumulation of wealth. When shareholders retire and have no taxable income or simply cease work in a certain tax year, the ability to draw monies is either tax free or to draw down on dividends which come with a 30% tax credit. These fully franked dividend payments are much sought after in retirement and would be a welcome addition to a tax free account based pension being paid from a superannuation fund.
The use of the personal investment company is well worth closer examination depending on your personal circumstances.