While superannuation is a powerful tool for building wealth in Australia, it comes with restrictions, such as limited access until retirement age. For those looking to diversify their wealth-building strategies or access their funds earlier, exploring options outside of super is essential. From trusts and companies to personal investment portfolios, there are several ways to grow your wealth while maintaining flexibility and control.
This guide explores the key strategies for building wealth outside of superannuation, helping you create a diversified and tax-efficient financial plan.
Why Build Wealth Outside Super?
While superannuation offers tax advantages and long-term growth potential, it’s not always the best option for every financial goal. Here’s why you might consider building wealth outside of super:
- Access to Funds: Superannuation is generally inaccessible until you reach preservation age (currently 60 for most Australians). Building wealth outside super provides greater liquidity and flexibility.
- Diversification: Relying solely on super can limit your investment options. Diversifying outside super allows you to explore other asset classes and strategies.
- Tax Planning: Certain structures, such as trusts and companies, offer tax benefits that can complement your superannuation strategy.
- Wealth Transfer: Building wealth outside super can make it easier to pass assets to the next generation or support family members during your lifetime.
Trusts: A Flexible Wealth-Building Tool
A trust is a legal structure that holds assets on behalf of beneficiaries. Trusts are commonly used in Australia for wealth building, tax planning, and estate management.
Types of Trusts
- Discretionary Trusts (Family Trusts): Allow the trustee to distribute income and capital to beneficiaries at their discretion. This is a popular option for families looking to manage wealth and minimise tax.
- Unit Trusts: Beneficiaries hold fixed units in the trust, similar to shares in a company. This structure is often used for joint investments or business ventures.
- Testamentary Trusts: Established through a will, these trusts come into effect after the settlor’s death and are often used for estate planning.
Benefits of Trusts
- Tax Efficiency: Income can be distributed to beneficiaries in lower tax brackets, reducing the overall tax burden.
- Asset Protection: Trust assets are generally protected from creditors and legal claims.
- Estate Planning: Trusts provide a structured way to pass wealth to future generations.
Considerations
- Setup and Maintenance Costs: Establishing and managing a trust involves legal and administrative fees.
- Complexity: Trusts require careful management to comply with legal and tax obligations.
Companies: A Strategic Wealth-Building Structure
Setting up a company can be an effective way to build wealth, particularly for business owners or those with significant investments. A company is a separate legal entity, which means it can own assets, earn income, and pay tax independently of its shareholders.
Benefits of Companies
- Lower Tax Rate: Companies in Australia pay a flat tax rate of 30% (or 25% for base rate entities). This can be lower than the marginal tax rate for high-income earners.
- Retained Earnings: Companies can retain profits for reinvestment, providing a tax-efficient way to grow wealth.
- Limited Liability: Shareholders are not personally liable for the company’s debts, offering asset protection.
Considerations
- Setup and Compliance Costs: Establishing and maintaining a company involves registration fees, annual reporting, and compliance with corporate regulations.
- Tax on Dividends: When profits are distributed to shareholders as dividends, they are taxed at the shareholder’s marginal tax rate, which may reduce the overall tax benefit.
Personal Investment Portfolios
Building a personal investment portfolio is one of the most accessible ways to grow wealth outside super. This involves investing in a mix of asset classes, such as shares, property, and fixed income, based on your financial goals and risk tolerance.
Key Components of a Personal Portfolio
- Shares and ETFs: Investing in individual shares or exchange-traded funds (ETFs) provides exposure to the stock market and the potential for long-term growth.
- Property: Direct property investment or real estate investment trusts (REITs) can provide rental income and capital growth.
- Fixed Income: Bonds and term deposits offer stability and regular income, balancing the risk of other investments.
- Managed Funds: Professional fund managers pool investors’ money to invest in a diversified portfolio, making it easier to access a range of assets.
Benefits of Personal Portfolios
- Flexibility: You have full control over your investment choices and can access your funds at any time.
- Diversification: A well-constructed portfolio spreads risk across different asset classes and markets.
- Capital Growth and Income: Portfolios can be tailored to focus on growth, income, or a combination of both.
Considerations
- Market Risk: Investments are subject to market fluctuations, which can impact returns.
- Tax Implications: Capital gains tax (CGT) applies when you sell assets for a profit. Dividend income is also taxable, although franking credits can offset some of the tax.
Diversification Across Structures
For many Australians, the best approach to building wealth outside super is to diversify across multiple structures. For example:
- Use a discretionary trust to manage family wealth and distribute income tax-efficiently.
- Establish a company to retain business profits and reinvest in growth.
- Build a personal investment portfolio for flexibility and access to funds.
Seek Professional Advice
Building wealth outside super can be complex, particularly when it comes to choosing the right structures and managing tax implications. A financial adviser or accountant can help you:
- Evaluate your financial goals and risk tolerance.
- Choose the most appropriate structures for your needs.
- Create a diversified investment strategy.
- Navigate tax and legal obligations.
Final Thoughts
While superannuation is a cornerstone of retirement planning, building wealth outside super provides flexibility, control, and access to funds when you need them. By exploring options such as trusts, companies, and personal portfolios, you can create a diversified and tax-efficient strategy that supports your financial goals.
Remember, the right approach depends on your individual circumstances, goals, and risk tolerance. Take the time to evaluate your options, seek professional advice, and create a plan that sets you up for long-term success.
If you’d like to explore strategies for building wealth outside super, click here to schedule a complimentary consultation with an EPG Wealth adviser.