Company vs individual?

[Nathan_b]

Hey everyone,

Just trying to set up my share portfolio, and was wondering if anyone can help me with how too structure my portfolio? I understand the pros and cons with real estate with CGT exemption etc...

But just trying to nut out the share setup before I go too much further.

 

[GreatPig]

The main choices are really company, trust, and individual. Which is preferable depends on the type of activity you're planning (ie. share investing or share trading business) and your other circumstances.

In my opinion, a company is only worth considering for a share trading business. For share investing, trust or individual would be better. The choice from those two would depend on a number of factors like family situation, age, personal income levels, risk of law suits as an individual, other investments or business activities you might have, amount of capital you intend to use, etc.

The choices are not much different to those for real estate in the end.

GP

 

[sleeper88]

Just a quick question, if say, I start a company to trade shares, all profits are taxed at 30%, but in order to withdraw the money from the company, (through distributions/dividends), wouldn't I be effectively double taxing my profit, even when I include franking credits (say I'm on the highest marginal tax rate)

 

[Nathan_b]

Thanks for reply, i am looking at active trading not buy and hold at present.
with the double taxing, it wouldnt occur. the payment made to you as individual would be classed as an expense of the company, and would not be taxed to company, only yourself as individual you would pay tax.

 

[GreatPig]

the payment made to you as individual would be classed as an expense of the company

Typically that's not the case. You would normally take out funds as dividends, not salary or other expenses, otherwise you'd lose all benefit of the 30% company tax rate.

And while as a dividend nothing would be double-taxed, if the shareholder was on the top marginal rate the income received would effectively still be taxed at that rate. This means that there is no tax benefit to the shareholder by using a company and then taking dividends. However, it does allow profits to be retained indefinitely in the company with only 30% tax being paid, which allows you to build up trading capital quicker than as an individual on the top marginal rate. So it's good for the share trading business, but not necessarily any better for the shareholder as an individual (although a more profitable business will ultimately be better for the shareholder as well).

Another possibility, if the amount of funds being used warrants the extra cost and personal circumstances are favourable, is to trade in a company owned by a family trust. Then dividends can be distributed to low income beneficiaries. However, even that has drawbacks and complications, particularly in relation to the trust loss provisions and restrictions on distributing franking credits (you'll want to research family trust elections and the trust loss provisions if you're considering going down this path).

wouldn't I be effectively double taxing my profit, even when I include franking credits

Not double taxing. When you receive the dividend and franking credits, you get assessed for tax on the total amount (ie. distribution plus franking credits) at your personal tax rate and then receive a credit (effectively a rebate) for the franking credit component. The ultimate effect is you would pay tax exactly the same as if you'd received the total amount as personal income. There's no advantage or disadvantage either way (provided certain other rules don't restrict your ability to claim the franking credits).

Cheers,
GP