Private Investment Companies

Nov 16, 2021 | Finance

For those of us who start a business at a relatively early age, and work through the system until 65 and beyond, there stands a chance to accumulate up to 45 years’ worth of savings, give or take.

With the sheer size and value of wealth now sitting across superannuation funds in Australia, politics may succumb to the temptation to plug larger and larger gaps appearing in their respective annual budgets.

With each successive Federal Budget instalment, we should be bracing ourselves for unexpected changes. There will be winners and losers with any such changes; however, the Government’s goal is to deliver wins in the longer term by necessity.

So, if all of your retirement savings are sitting in superannuation – over a lifetime, you are facing 45 years of potential investment volatility.

In the early years, superannuation is not as material, as your only savings usually come from compulsory employer contributions. However, towards the end of your working life, as you will have built up a superannuation nest egg over many years, this becomes substantive and crucial as you look to retiring.

For many, it is only later in their working lives that they can afford to seriously save for their retirement, after paying off their home and the costs of bringing up and educating their family start to abate.

What are your Options Outside Superannuation – Private Investment Companies (‘PIC’)

 Whilst effective retirement planning definitely includes contributing to superannuation, there are other options too.

Generally speaking, you may aim to own your own home, with the goal to pay it off as quickly as you can afford. Every dollar of interest you save gives you an effective after-tax saving on the principal you have paid off, and your principal place of residence is one of the last bastions of tax-free capital gain.

Before you start thinking about your next property, and looking into the intricacies of negative gearing, consider starting a Private Investment Company, or “PIC”.

In planning for financial independence, diversification is not just about your investment classes and geographies, but also your investment structures. 

Having a PIC has the potential to provide a level of structural diversification to help mitigate against political risk. This is not suggesting it is better than superannuation, however many of the tax benefits are being whittled away by successive governments, and regulation is becoming more complex.

The Advantages of PIC’s:

  • PIC’s are not required to have an external administrator/be audited
  • There is no limit on contributions into a PIC as part of a personal savings plan
  • You can withdraw funds at any time from a PIC
  • There is no requirement for a PIC to have a Trustee
  • There is no restriction on the PIC borrowing from or lending to shareholders, subject to paying commercial interest rates
  • The income taxation regime for PIC’s is relatively simple.
  • When income tax is paid by the PIC, the franking account is credited. These franking credits can be used in the future.
  • Income earned by the PIC can then be reinvested in listed securities which pay fully franked dividends.
  • PIC Investments can offer asset protection

The one big drawback of investing through a private company is that companies do not receive the 50% capital gains tax concession on the sale of assets. However, with the corporate tax rate at say 25%, and the top marginal rate at 47%, this disadvantage is not huge if you are on the top rate of personal tax.

PIC’s do not receive the CGT 50% concession, which is a reason that many advisors prefer the use of superannuation and discretionary trusts.

However, the use of a PIC can be a useful addition to your investment strategy and provides a number of benefits over other structures. It is worth considering along with superannuation and discretionary trusts.

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