Phil Broderick, principal at Sladen Legal, said there are a number of reasons to invest in an SMSF, particularly for the tax concessions. However, he also warned that these are becoming more difficult to navigate with the introduction of Division 293 tax, Division 296, death taxes, and other regulations such as the sole purpose test and NALI rules.
“There are a number of options to invest outside of super such as in an individual’s name, company, discretionary trust, unit trust, hybrid trust, fixed trust, partnership, joint venture,” he said.
“But which one do you choose? The answer is it depends on many factors, which is why it is useful to have a checklist.”
Some of the things that need to be considered when deciding in which structure to invest include what the individual may be investing in, whether it is a multiple investment or single investment, or a family investment, and whether you need to borrow to fund the investment.
“One of the major things to consider is asset protection,” he said.
“For example, as a sole trader, you need a corporate structure, whether it’s a company in its own right, or it’s a corporate trustee. There are lots of different asset protection issues such as claims by creditors so sometimes, when you look at any of these entities, some have better business creditor protection, while others have better director liability.”
Broderick said one of the other things to consider when looking at investing outside of super is whether you are accumulating income.
“You might go through a company if you’re accumulating or distributing income, and look at perhaps more of a trust type structure for management and control. A company structure has the protection of corporate law.”
He added that different trusts also have different levels of complexity versus that of a company structure.
“There is also entry and exit [strategies] to consider, which is typically easier in a corporate structure where you’re issuing or transferring shares, as compared to trust structures.”
Furthermore, any entity in which an individual may choose to invest has different tax consequences.
“There are different taxes on entry, exit, accumulating income, distributing income, and you have got to work through those. In particular, one driving factor [in choosing] is capital gains tax discount,” Broderick said.
“If you are buying a capital appreciating asset, that really does direct which entity you choose. There are also myriad state taxes that need to be considered. There are payroll taxes if you have employees and WorkCover.
“If you are dealing with real estate then there is stamp duty and land tax and land holder duty. And for those in Victoria, there are other recent taxes like windfall gains tax, economic title and duty, sudden sale duty, increased land taxes and vacant residential land tax.”
