Structures
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Structures
Following on from our last weekly, this week, we will provide a basic run down of the Proprietary Company investment structure.
Although this is most often used as a structure for businesses, it can also be used as a vehicle for investments. Companies have the ability to own property, shares, enter contracts and are subject to legal liability in the same way as an individual. Whilst shareholders represent part-ownership of a company, it does not give the shareholder any entitlement to the assets of the company or responsibility of any liabilities.
Company
What is it?
A Proprietary Company is a separate legal entity from its shareholders, who are the owners. It is a good investment vehicle when all the investors are of a suitably high income, as investment income is taxed at a maximum 30% tax rate, regardless of your personal tax bracket.
How does it work?
A company requires a minimum of one shareholder and one director. By providing equity to a company, in turn you can receive shares in the company. The appointed director/s are then responsible for overseeing the affairs of the company and ensure compliance with legal obligations, which include making decisions on how the company’s assets and investments will be used and income managed.
What are the main benefits?
Proprietary companies have a maximum 30% tax rate on income, potentially reducing the tax rate for high taxable income earners. Companies can continue indefinitely and have no limits to the number of shareholders, which may assist in estate planning. The company structure works best for long-term income generating investments as the income from fully franked dividends do not attract additional tax, and dividends including franking can be passed on to the shareholders. The company can also retain profits within the business and choose to distribute strategically.
How are they set up?
The general steps to establishing a company start with registering the company with Australian Securities & Investments Commission (ASIC), which involves choosing a company name, providing details about director/s and shareholding/s, and paying the registration fee. You will then need to obtain an Australian Business Number (ABN) and Tax File Number (TFN) through the Australian Taxation Office (ATO), establish a bank account in the name of the company and organise the record keeping side of the business.
What else should you consider?
It is important to seek thorough tax and legal advice from suitable qualified professionals before considering setting up a company for investing as shareholder agreements and company constitutions may need to be drafted. Other considerations include, the costs to set up, which can be high, and there are ongoing requirements for accounts and tax returns to be completed. Investment losses are only able to be offset against future income and capital gains from the company and the company does not receive 50% capital gains discount on asset sales.
As always please reach out to the team if you like to discuss further.