The Australian Labor Party’s proposal to halve the capital gains tax discount to 25 per cent will lead to a surge in the number of advisers recommending investment companies to their clients as an alternative ownership structure for holding assets, according to an advice expert.
Jonathan Philpot, a wealth management partner at advice and accounting firm HLB Mann Judd, says that if Labor were to win the election in May and implement the proposal, a 30 per cent company tax rate may be a decent outcome for high income earners.
“If all beneficiaries are in the highest tax bracket, an investment company may be the most tax-effective structure to invest long-term wealth,” Philpot says. “The CGT rate is not discounted, but the 30 per cent tax rate is now lower than the 25 per cent discount to the marginal tax rate (plus Medicare levy) of 35.25 per cent.”
Philpot warned that the costs associated with setting up and running a company meant a minimum of funds needed to be invested to make it worthwhile.
“If it was only… let’s just say $100K or less… typically you don’t use those sorts of structured companies until you’ve got more,” Philpot explained. “But if it is [for] more of a longer term… and you start to get up to about that $500,000 level, you start seeing the tax benefit the company is saving far outweigh those compliance costs.”
The time is now
Betting agency Sportsbet has the ALP as heavy favourites to win the next federal election; every dollar spent backing the party will pay $1.16 at current odds, while the Coalition is paying $4.25.
Although Labour proposes the CGT discount cut, any proposed legislation to change CGT tax rules will need to be voted on by the Senate.
However, for Philpot, the time for advisers to start considering alternative investment structures is now.
According to Michael Hutton, wealth management partner at HLB Mann Judd, the compliance cost to set up an investment company actually measures up well against the other options.
“The compliance costs aren’t dissimilar to a self-managed super fund. It’s just a set of accounts – so a tax return and minutes,” Hutton explained. “It doesn’t have to cost more than an SMSF.”
And while becoming an SMSF trustee requires a degree of engagement and knowledge, he says that using a company structure can often be less onerous.
“It’s probably less, if anything,” Hutton says. “There’s a lot less rules and no investment restrictions; no sole purpose test, no requirement to pay pensions each year, no limits to how much you’re putting into the company. It’s actually a very good estate-planning mechanism.”