Tax Rates of Different Structures

Clients pay tax at a range of tax rates depending on their income level. So, how can you make sure you have got the tax side of things covered? On essential part of this is to understand how the different legal structures are taxed...

Individuals (personal income)

Individuals pay tax at a range of tax rates depending on their income level. For individuals earning an above-average income, much of that income is taxed at 37% or 45% plus Medicare levy. In addition, for the years ending 30 June 2015 to 2018, a 2% budget repair levy on incomes above $180,000 will apply. 

Incorporated Companies

Companies pay tax at 30% (or 28.5% for small business entities after 1 July 2015).

However, the 30% tax payment is just ’round one’ of a multi-round game. This is because the ultimate rate of tax is not known until the company’s after tax profits are paid out as franked dividends to the eventual beneficial shareholder (i.e. the Directors or Shareholders of the company, which could be companies, trusts or natural persons themselves).

If, in the year in which the company’s profits are paid out, the individual’s tax rate is more than 30%, extra tax will be paid. This means the ultimate rate of tax will be more than 30%. If, in the year in which the company’s profits are paid out, the individual’s tax rate is less than 30%, there will be a part or full refund of franking credits. This means the ultimate tax rate is less than 30%. Companies thus create income distribution flexibility over a number of income years. The distribution can be timed for those years when the shareholders’ other taxable income is low. This might occur after children turn 18, for example, but before they start working in highly-paid employment.

Companies pay tax at 30%. 

Companies pay tax at 30%. 

Trusts

Trusts are normally not taxed. A trust’s net income is instead attributed (essentially, streamed or given across to) to its beneficiaries (unit-holders if the trust is a unit trust). These beneficiaries are taxed on the net income depending on their own tax profile. Sometimes net income passes through a series of trusts until derived by an individual or a company, in whose hands it is ultimately taxed.

Discretionary trusts, or family trusts, do not have units. Instead, they allow the trustee to allocate net income among the beneficiaries. These beneficiaries are usually family members or other trusts and companies controlled by family members, who will pay a lowered amount of tax on it.

Trusts create income distribution flexibility among related persons in a particular income year. Often, an investment company might be used where the shares in the company are owned by a discretionary trust. This allows the client to enjoy the ‘best of both worlds.’ That is, the client enjoys multi-dimensional distribution flexibility, over time and between beneficiaries, due to:

  • the income distribution flexibility amongst related persons within a particular year, created by the discretionary trust; and
  • the income distribution flexibility over a number of income years created by the company; and
  • the dividend franking protocols.

In summary

In summary, it is probable, but not certain, that any particular investment will do better owned by a tax efficient structure, such as a family trust, a company owned by a family trust or a SMSF.

Clients who use tax efficient investment structures will probably get better after tax results than those who do not, both for themselves and for their families.


HOW WE SUPPORT CLIENTS

At Profy Finance and Wealth, we have supported business and clients who are looking to finance commercial property assets, through:

  • Helping them get clear on their objectives
  • Ensuring financial affairs are structured effectively
  • Helping them plan for any taxation outcomes
  • Assisting in Accounting and Taxation needs with referrals to preferred accountants
  • Wealth planning, investing, and retirement
  • Arrangement and recommendation of SMSF or structures to suit their situation
  • Helping clients take an active approach to their investments
  • Ensuring Debts and Mortgages are well managed and with good providers

At Profy Finance and Wealth, we cover financial advice and mortgage & finance broking to get more holistic results for our clients. Learn more about how we could help...