As a financial adviser, I am often asked how do high income earners and small to medium business owners structure their investments tax efficiently outside of their superannuation.
There’s a lesser-known strategy that can help reduce taxes, increase flexibility and provide you with access to funds before retirement. It’s not a replacement for super, but a complementary strategy that works alongside it. Here’s how it works.
Rethinking how investment income is managed
If you have a family trust, you might be distributing dividend income (profits paid out by companies you invest in) to family members or beneficiaries.
When those dividends come with franking credits (which represent the tax already paid by the company – usually 30%) they help reduce your personal tax bill.
However, if any beneficiaries are in the top tax bracket (47%), they may be hit with a 17% ‘top-up tax’ because the franking credits attached to the dividend don’t fully offset the 47% marginal tax rate.
For high-income earners, this can mean a significant tax bill—especially if you’ve already exhausted your options for distributing income to lower-taxed beneficiaries.
A more efficient way to manage surplus income
Instead of distributing excess income from a family trust to individuals, this strategy involves directing it to a company that acts as a beneficiary of the trust.
Here’s what happens:
- At the end of the financial year, the trust distributes income (and transfer the cash) to the company.
- The company pays tax at the corporate rate—typically 25% for base rate entities or 30% for investment income.
- When the investment company later pays out this income as a dividend, it includes franking credits for the tax already paid.
This structure effectively eliminates the 17% top-up tax for high-income earners. It also allows the funds to be retained in the company and reinvested in a tax-efficient environment.
What to invest in
Once the funds have been distributed to the company it can use those funds to make investments. As companies don’t receive the 50% capital gains tax discount, this strategy isn’t ideal for property or growth-focused investments. Instead, it works best with income-producing investments like fully franked Australian shares—think bank stocks or other dividend-paying companies.
These investments generate regular income and franking credits, which can be used to offset tax when dividends are paid out to shareholders. Income received as fully franked dividends can also be reinvested within the investment company without any further income tax payable and if this is regularly repeated over time, it has a compounding effect.
Keeping access to the funds
Unlike super, which locks away your savings until retirement, this approach offers greater flexibility.
It is important to note that once the funds are withdrawn from the company a dividend must be paid to account for this otherwise additional tax may apply. Avoidable common Div 7A errors medical professionals make – William Buck Australia
If the company is owned by a family trust you can keep the funds invested, or distribute income to family members when needed—either during retirement or earlier.
Additional super contributions
This structure can also help you to top up your super in a tax-effective way.
If someone over 67 is employed as a director of the investment company, they can:
- Withdraw those funds tax-free between the ages of 67 and 75, creating another layer of flexibility and tax efficiency.
Why it matters
This strategy isn’t for everyone-but for high-income earners and business owners with a family trust and surplus income they want to invest efficiently it can be a powerful way to:
- Reduce or eliminate top-up tax
- Make full use of franking credits
- Reinvest income in a tax-effective environment
- Retain control over how and when funds are accessed
- Boost retirement savings through additional super contributions
As always, it’s important to seek tailored advice before implementing any structure. However, for those in the right position, this approach can deliver significant long-term tax and investment benefits.
Want to explore if this strategy could work for you?
Speak to your William Buck advisor or contact our Wealth Advisory team to discuss whether this structure suits your situation.
