Join our investing community

How best to legally structure my assets?

Discussion in 'Accounting, Tax & Legal' started by MichaelWhyte, 8th Jan, 2006.

  1. MichaelWhyte

    MichaelWhyte Well-Known Member

    Joined:
    5th Oct, 2005
    Posts:
    798
    Location:
    Sydney, NSW
    Hi guys,

    I've thought for a while now that a Hybrid Discretionary Trust (HDT) was the way to go for holding my assets as an investor but would like to confirm with the experts here that this is indeed the correct course of action.

    I am, like most investors, diversified across asset categories. I primarily own units in the Navra fund, but am in the process of starting my Investment Property (IP) procurement programme. At present the units in the fund are in my wife's name as the lower income earner since they're all positively geared (hopefully), and I intended purchasing IPs in my name as the higher income earner to take advantage of the higher tax brackets as these will be negatively geared growth assets.

    So, should I setup some sort of legal structure to hold my assets? And, if so, what benefits would this afford me over that described above? i.e. Legal protection, tax minimisation etc.

    If I am to establish a legal structure then which one is best and how should I get it in place without spending more than I need to?

    I hope this thread will help quite a few fellow investors out there who are contemplating establishing a legal structure to hold their assets.

    Thanks in advance,
    Michael.
     
  2. Bob

    Bob Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    131
    HDT and Navra Fund

    Michael,

    That's a good question. I have my wholesale units within a family HDT structure only because I already had one set up, and thought I might as well utilise it for income distribution purposes. However, I have been toying with the idea of setting up another company that the trust can distribute to. Any excess that you don't need can then be paid to the company which will be taxed at 30% rather than 48%. I am unsure how this effects the income when you draw down from the new company in regards to imputation credits. Nick???


    Bob
     
  3. artgul

    artgul Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    77
    Location:
    Sydney
    Since you are starting the structure, beside the HDT, you may consider also the "Property Trust" that Ed said he had developed. For property, it seens to be the best one however, it still is kind of a back box for the majority of us. If you get the chance to learn about it, it'd be appreciated if you could educate us.

    Regards,

    artgul
     
  4. perky

    perky Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    300
    Location:
    Sydney
    Hi,
    I hope the mods don't mind me posting this - but the next SIG Meeting on Somersoft I have organised on Jan 31 will have Ed Chan and Tony Melvin talking about their "property investors trust" that they have developed.
    The link to the meeting is here
    I personally had a HDT set up 3 years ago by Dale GG, and my Dad had one set up about 2 years ago by Nick.
    I will be interested to see how the "property investors trust" works !!
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Michael

    That's a great question. But it doesn't necessarily admit an easy answer. There are a whole range of issues which need to be considered, tax and asset protection being the primary ones of course.

    One thing that an appropriate structure will give you, which you haven't mentioned above, is FLEXIBILITY. You are in fact already "structuring" to some degree by having your Navra units in your wife's name! What I'd suggest though is that for something like real estate, where it is so costly to move due to stamp duty (in addition to CGT), you need to take a very long term view. Your wife may well be on a lower income now, but that may or may not always be the case. Similarly, will your negatively geared properties always be negative? With additional redraws of any spare equity perhaps, but perhaps not? It will depend on your plan.

    It sounds like you've got a "plan" about how you're going to grow your wealth. So what you then need to do is figure out a structure or combination of structures for holding and controlling your assets which achieves the best fit between competing objectives of tax reduction, asset protection, simplicity and flexibility.

    The second article on Asset Protection in the Education section http://www.invested.com.au/education/content/real-story-on-asset-protection-part-2 should give you some initial pointers about what you should be aiming for.

    There is no one-size-fits-all. But, generally speaking, discretionary trusts are ideal where there's no or limited gearing and HDT's provide a great way of having most of your cake and eating it too when you are negative gearing. It's not all upside though...land tax...mutter mutter...shooting fish in a barrel...mutter mutter...greedy government mutter mutter. ;)

    If the HDT is well crafted it can operate just like a standard discretionary (aka family) trust until units are issued.

    Hope that give you some pointers.

    Cheers
    N.
     
  6. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    Michael
    no need to issue units to your wife.
    The HDT can operate just like a disc trust and if it is +ve income your wife can receive it anyway.

    Bob, if the positive income in the trust pushes all the potential beneficiaries into a tax bracket greater than 30%, then yes consideration should be given to establishing a "bucket" company to receive distributions.

    This is just a deferral mechanism as at some stage the company will still need to pay down the income.
    NickM
     
  7. MichaelWhyte

    MichaelWhyte Well-Known Member

    Joined:
    5th Oct, 2005
    Posts:
    798
    Location:
    Sydney, NSW
    Nick,

    I really must book an appointment to come see you at your office. :D

    That simple response is even a bit too heavy for my limited skills in this area to comprehend.

    My wife is currently on paid maternity leave so is on a relatively low income around the $40K mark so it made sense buying units in Navra in her name. She is about to go back to work though and is moving up the lawyer tree so will push $100K in the not too distant future. I'm on the top tax bracket and will still be well into it when it moves to $125K this year so the NG stuff will probably be in my name at present.

    I just know that this is tax inefficient though, and that there must be a better way. I like the idea of a bucket company so you can smooth the peaks and troughs year to year.

    Cheers,
    Michael.
     
  8. Glebe

    Glebe Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    932
    Location:
    Sydney, NSW
    Michael,

    I've got a HDT through Nick and the only thing inside the trust is managed funds. Managed funds are via margin loan (Leveraged Equities), borrowed in wife's name (she earns more than me). She borrowed $355 000 from Leveraged Equities, which essentially bought her 355 000 units in the trust. This means the full loan amount is tax deductible in her name. The trust then used this $355 000, and the amount we had already gifted it ($305 000), to invest $660 000 in the market.

    When financial year came around, 355/660'ths had to be distributed to her, the rest was our choice. We chose her brother because he's a low income earner. So this was quite tax efficient.

    The negatives is not so much the annual compliance costs (tax returns, corporate trustee costs) because they're outweighed by the tax efficiency, but the brainwork and paperwork involved. You have to do the maths a bit to see if it is worth it, but for us it is.
     
  9. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    It's a thing of beauty isn't it! I LOVE trusts. :D

    N.
     
  10. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    Michael,
    the major major major benefit of a trust is flexibility.

    What you have done at the moment is sensible for your current tax situation.

    also good to see that you are thinking ahead as many people do not and then it becomes an extremely costly exercise to unravel. :eek:

    NickM