Individuals/Partnership of Individuals
- Subject to the non-commercial losses provisions with respect to business losses, individuals can apply the tax losses against their other income. Excess losses can be carried forward for use in future years.
- Can access CGT 50% discount if the asset was held for more than 12 months, as well as potential application of other CGT exemptions.
- The disadvantage of this structure is that when the investment starts to be profitable the income cannot be split and will be taxed at the individuals marginal rates each year.
- No asset protection available to individuals
- Income can be distributed in the most tax effective manner, in accordance with the trust deed.
- Can distribute capital gains to beneficiaries who have capital losses or are able to access the 50% discount, subject to the relevant trust deed.
- There is an added level of protection, particularly where the trust has a corporate trustee, as beneficiaries do not hold an actual interest in the trust’s assets. Note that the effectiveness of this asset protection is undermined by the Family Court.
- Tax losses can only be utilised to offset against other income of the trust where the trust loss rules in Schedule 2F to the ITAA 1936 are satisfied.
- In addition, any excess tax losses are trapped in the trust and cannot be distributed to beneficiaries.
- Tax rate in a company is 30% or 27.5% if the company is an SBE.
- There is the ability for the investment to be structured so that interest deductions are claimed at the shareholder level rather than in the company itself. (The shareholder borrows to acquire or subscribe for shares in the company and then the company uses the funds to acquire the investment without any borrowings. This effectively transfers the benefit of the negative gearing from the company to the shareholder, circumventing the issue of having excess tax losses trapped within the company.)
- Tax losses are subject to the company loss rules.
- A significant disadvantage of holding growth assets in a company is the inability to access the general 50% CGT discount. There is limited options to extract the 50% Active Asset Reduction amount from the company tax effectively.
- A company has limited protection for the shareholders, as the shares are valuable assets and will be exposed to the shareholders creditors. The company provides limited liability as well as asset protection for the shareholders from the company’s creditors.
- A unit trust has the ability for the investment to be structured so that interest deductions are claimed at the unitholder level rather than in the unit trust itself. The unitholder borrows to acquire/subscribe for units in the unit trust and then for the unit trust to use the funds to acquire the investment without any borrowings. This effectively transfers the benefit of the negative gearing from the unit trust to the unitholder, thereby circumventing the issue of having excess tax losses trapped within the trust.
- Provides asset protection for the unitholders from the unit trust’s creditors.
- Tax losses are subject to the trust loss rules and excess tax losses are trapped within the trust.
- Payments of non-assessable amounts to unitholders can reduce the cost base of their units in the unit trust, to the extent that the cost base is completely eroded then the excess paid to the unit holder will be a capital gain.
- Limited protection for the unit holders as the units are valuable assets and will be exposed to the unitholder’s creditors.
- Tax rate is 15% whilst in accumulation mode. Assets supporting a pension are tax-free subject to the $1.6 million transfer balance cap applicable from 01/07/2017.
- Tax losses can be used against the fund’s other income, including assessable superannuation contributions. Excess losses can be carried forward for use in future years.
- Assets in the SMSF are trapped within the superannuation system until a condition or release has been satisfied by a member, otherwise than by way of sale in which case the sale proceeds may be similarly trapped.
- The ability for the SMSF to borrow is limited.