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High income and investment structures

Discussion in 'Accounting, Tax & Legal' started by oracle, 24th Sep, 2016.

  1. oracle

    oracle Member

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    Would like to get some opinions from members regarding situation where you start building share portfolio for income while still working and gradually things start to compound and you are in situation of earning high income from employment and investments and you start to pay top marginal tax rate. I know it's a good problem to have but still you want to find best solution to this problem.

    I am in this situation where both of us are earning good incomes. Have setup family trust to build share portfolio which is generating good cashflow. We need to distribute all income and franking credits each financial year. The portfolio is growing each year due to savings re-invested and we still are in our mid to late 30s so have long way to go before we quit full time employment. We salary sacrifice full limit each year into SMSF.

    This problem of paying lot of tax is going to get bigger and bigger as years pass by and income keeps rising. I believe family trust would work well when both of us quit full time employment. And even then say you build portfolio well into seven figures generating cash into six figures you definitely are not going to spend it all so how do you structure so that income can be taxed at lower rate and can be reinvested.

    One option that comes to mind is company structure where you cap your tax to 30% but obviously you lose capital gains tax concession. What about situation where you setup bucket company that distributes family trust income to it and the company pays 30% tax and declares some dividends and franking credits to shareholders and rest gifts back to family trust to reinvest? Can this work? Are there better alternatives?

    What do some of you do to handle tax situation once investment income crosses 30% tax threshold?

    Cheers
    Oracle.
     
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  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    First up, family trusts are primarily for asset protection, not for tax planning.

    That being said - it sounds like you could do with some asset protection anyway, and there are some tax planning benefits to be had from a discretionary trust setup, so I think it's a very good way to go. This is what we do ourselves.

    Yes, if your trust deed allows it, you can have a company act as a beneficiary and pay distributions to the company so it will only pay tax at the company tax rate and can retain income within the structure (whereas a trust will need to pay out all income or else face very high tax rates).

    So I think you're on the right path - discretionary trust to give you flexibility to stream income to the lowest earner (if you have kids, you can distribute to them once they turn 18 as well), or potentially to a company if you're both already paying high tax rates.

    You'll need good advice to make sure you're optimising your flow of income - especially with the loss of CGT discounts if paid to the company.

    I don't know of any other alternatives other than perhaps look at using negative gearing to offset some of the income (borrowing to invest in growth assets - eg real estate - and offsetting those costs against other income).

    Obviously that only works if you are making more in growth than you are losing in interest costs.

    You could even do that within the trust - hold real estate assets and fund the cashflow using the proceeds of your share portfolio.

    This is exactly what we do.
     
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  3. austing

    austing Well-Known Member

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    Just a few thoughts off the top of my head.

    I assume you're looking to retire earlier than 60 which is when you'll be able to access Super. So the goal is to have enough capital / income from when you retire early to live off until you can access Super?

    The use of a bucket company in conjunction with a family trust is quite common.

    Have you considered contributing after-tax contributions into Super? Will be taxed at 15%.

    Another option is Insurance bonds.

    When retired you might be able to continue contributing $25K each (dist from family trust) into Super.

    Will think some more after feedback from you on these ideas.
     
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  4. Pippen

    Pippen Member

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    Is there a dollar point when ppl decide to go down the trust structure route? Ie 100k portfolio ? Or are ppl smart enough to begin with the end in mind?!
     
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  5. austing

    austing Well-Known Member

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    The advice I was given years ago is to start with the end in mind. Starting with a smaller amount (say $100 - 200K) can be worthwhile provided you are confident that this will build to a sizable amount overtime. If you think that it'll never be more than a few hundred thousand dollars I wouldn't personally use a trust structure.

    We started our SMSF with only around $80K but knew that this would rapidly increase in size.

    There will be differing opinions on what starting amount is ideal.
     
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  6. Pippen

    Pippen Member

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    Appreciate the reply, yes im with australian super around 85k at 33 yrs of age, jus paid off ppor and salary sacrifice up to 25k pre tax with 14% company match, prolly jus invest in my name and my partners lower income name no kids as yet!
     
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  7. orangestreet

    orangestreet Member

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    I am somebody who set up a discretionary family trust (corporate trustee) before I had a single dollar invested in shares. We now have a fairly substantial amount (for us anyway) in the trust and I could not be happier. The benefits of buying in the right structures from the beginning and the ability to distribute income to beneficiaries will be invaluable in the decades to come.

    I expect the portfolio to grow into 7 figures in a few years and I will be glad to have options to distribute it as we see fit then.
     
  8. Pippen

    Pippen Member

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    May i ask the amount you were investing early on in the piece? Was it just 10k to 20k or did you have lump sum to invest from property, gifts, or other means?!

    Jus trying to gauge it as i have the idea to invest around 20k per year whilst continuing to salary sacrifice into super for at least next 10 years!

    Cheers
     
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  9. Terryw

    Terryw Well-Known Member

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    A discretionary trust would be the ideal way as long as it is set up nicely and you have the ability to companies (plural) as beneficiaries - probably worded in such a way that any company in which a beneficiary is a director or shareholder of will also be a beneficiary.

    Excess income of the trust could be distributed to this company. Tax would be paid and the dividends build up could be paid out in future tax years when you are on a lower income. Franking credits could flow through too.

    But this money could not be lent back to the trust without Div 7A loan agreements in place with interest rates charged - this may or may not work because it is really just shuffling money around - interest charged to the trust could be deductible to the trust.

    Alternatively the company could then invest the money - or perhaps lend to another company to invest (asset protection).

    For a bucket company you need to carefully consider who the shareholders should be because it will become a valuable company as the holdings build up.

    On top of this you also have to consider succession on your death.

    Trust assets do not pass via your will. Shares do - if you own then personally but not if you own them as trustee.

    if you have two children you might want to consider trying to build up two separate entities - so you can arrange the control of one to pass to one child and the other to the 2nd child. This will allow them to go their separate ways without needing to sell or split the trust - which could trigger CGT. but it will be hard to make sure the values of each trust and bucket company are even unless you have identical shares in each.

    This would also help if you want to pass control while you are still alive.

    When setting this up also consider loss of capacity - you cannot be director or trustee if you lose capacity so consider who would take over and make sure this would fall to the right persons.

    How are you contributing to the trust now? A gift or a loan or just moving money over into the trust account with no consideration?
     
  10. oracle

    oracle Member

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    Through loan agreement setup through you :) was done in 2014 so might not remember.

    Cheers,
    Oracle
     
  11. Terryw

    Terryw Well-Known Member

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    Thats good!

    I am not sure of your real identity - but did you use the loan agreement so that the money can come back to you at death and pass via your will - into a discretionary testamentary trust?
     
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  12. oracle

    oracle Member

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    Probably not, cannot remember reading such clauses in the agreement document.

    Cheers,
    Oracle.
     
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  13. Terryw

    Terryw Well-Known Member

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    No, they would not be in the loan agreement. A loan means the money is always yours and as such it can pass via your will.

    Whereas a gift to the trust would mean that money would not pass via your will (you have given it away).
     
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  14. Il Falco

    Il Falco Active Member

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    another thing, hold growth stocks that you intend to sell one day in the trust. Hold LIC's, and fixed interest in the investment company. With the LIC's can be as simple as ticking DRP box on those and never having to think about it until you wish to declare a dividend.
     
  15. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Don't forget that you (or the company) still have to pay tax on income even if it is reinvested via DRP and you never actually see the cash. So "never having to think about it" isn't entirely accurate.
     
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  16. Il Falco

    Il Falco Active Member

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    Read again. LIC's = FF dividend.
     
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  17. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Do all LICs pay FF dividends?
     
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  18. Il Falco

    Il Falco Active Member

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    Yes. Well all that I have seen.....................LIC pays company tax on income and distributes with full franking.
     
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  19. austing

    austing Well-Known Member

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    A few other ideas. AFI and WHF offer Shares Bonus plans (DSSP) where unlike a DRP no tax is payable on the dividend.

    http://www.afi.com.au/media/scripts/doc_download.aspx?did=262

    Australian Foundation Investment Company Limited (AFIC): bonus share plan | Australian Taxation Office

    Bonus Share Plan (WHF)

    And internal compounders as @Il Falco mentioned. Also No CGT until you sell.

    However if these are in a SMSF (eventual tax free pension) there will potentially be no CGT when you eventually sell both the above.

    So no tax during accumulation and no tax in retirement!
     
    Last edited: 27th Sep, 2016
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  20. austing

    austing Well-Known Member

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    Not all, but the ones @Il Falco would be thinking of do.
     
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