Scenario
Alex, an Australian resident, plans to invest in residential property and some shares. He expects rental income of AU$50,000/year and dividend income of AU$20,000/year. He’s considering whether to hold via company or family trust.
Company vs Trust: Tax Rate & Distribution Flexibility
| Feature | Company | Trust |
|---|---|---|
| Tax rate on profits retained in entity | 30% (for base rate entities possibly lower, e.g. 25-27.5%) | Trust income taxed in hands of beneficiaries at their rates (could be as high as 45%) |
| Distribution flexibility | Rigid: company can pay dividends but taxed at company rate plus franking for recipients | Very flexible: trustee can distribute among beneficiaries to minimize tax bracket impacts |
| Asset protection and succession planning | Separate legal entity; good protection; complexities for ownership changes | Trusts can shield assets; succession planning easier in some cases |
Example Comparison: Alex’s Tax Outcome
Assume Alex holds through a company and retains profits:
- Rental + dividends = $70,000 income → company pays 30% = $21,000 tax → $49,000 retained or distributed with franked dividends.
Vs. Trust distributes among family members: possibly lower marginal rates (e.g. someone on 19% rate, etc.), resulting in much less total tax paid vs company-plus-dividend model.
Other Considerations: Capital Gains & CGT Discount
- Individuals and trusts may access 50% CGT discount on capital gains if asset held > 12 months. Companies cannot. This matters if Alex plans to sell property or shares after holding long term.
Negative Gearing & Loss Utilization
- In a trust, rental losses can flow to beneficiaries who have other income to offset. In a company structure, losses stay in the company and can’t always be used by owners personally unless they receive taxable income from the company.
Compliance & Reporting Load
- Company: Annual ASIC fees, audited financial statements if large; more formal structure.
- Trust: Requires trust deed, usually hires or appoints beneficiary trustees; distributions must be resolved before end of financial year; possible higher administrative costs.
Key Actions for Alex (and Similar Investors)
- Model after-tax cash flows under both structures, factoring in distribution timing and marginal tax rates.
- Project future disposal events to capture CGT discount implications.
- Consider flexibility of trust for succession or changing family income situations.
- Assess compliance costs vs tax savings.
- Seek specialist advice to align your structure with your long-term goals.
Conclusion
For many Australian investors, a trust often delivers better flexibility and tax savings, especially when income can be spread across beneficiaries in lower tax bands and capital gains discounts leveraged. However, companies may suit those seeking asset protection, raising capital, or retaining profits for reinvestment. The best setup depends on income levels, asset types, timeline, and compliance appetite.