Neg gear loss v trust flexibility

Discussion in 'Accounting & Tax' started by Arthurgriffin23, 10th Nov, 2016.

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  1. Arthurgriffin23

    Arthurgriffin23 Member

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    I am about to sink $500k into shares being managed by BT. The fin planner there is saying I should put the shares all in my name as I am in highest tax bracket. My wife only earns $34k per year. I was saying I should use discretionary family trust as we intend using the returns only when we retire in like 20 years. Fin planner reckons that's crazy as we lose negative gearing deduction up front. My kids are 9 and 7 so can't distribute any returns there but that's not an issue as loan repayments will outstrip returns initially anyway. Any thoughts about the loss of gearing v flexibility of the trust distribution later?
     
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Hangon ... you're borrowing to invest $500K in shares and negative gearing it all?

    Let's talk about this plan a bit more.

    What interest rate? What is your expected return? What will the cashflow shortfall be? Which shares? Are you expecting them to become cashflow positive at any time? What MER are you paying? How is your planner getting paid? Do you own the property you live in? Are you in a high risk profession (likelihood of getting sued?)? Where is the money coming from to make the investment? Do you have other assets? Do you have other debts?

    I have sooo many questions about this plan! Perhaps you need to provide a bit more detail than simply looking at it as a "trust vs personal" question ... since I think it is far more complicated than that.

    I love trusts - I think they are fantastic and I use one myself ... but you have to use them the right way and you have to be aware of the implications of using them.

    What exactly is the planner recommending you do?
     
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  3. Arthurgriffin23

    Arthurgriffin23 Member

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    Thanks for the reply. Here's the.breakdown:

    I am borrowing against equity in my PPOR so interest is like 4.8%. I am going to get BT to manage the portfolio for me. Therefore returns will depend on the success of their management of the portfolio. I am taking a loan over 30 years and paying back P&I. Goal is to use this for wealth creation. I'm not in a high risk profession in terms of being sued. I own one investment property outright worth $260k, another one worth $210k I owe $45 on, I own another one worth $550k with $80k owing and another villa worth $470k with borrowings of $450k on. All property is CF positive and all in
    My name except for the last property. The planner just works for BT and there will be a plan set up fees and ongoing fixed fee of $3k fixed to manage the portfolio. I am going for growth strategy in shares so not expecting greater than 2-3% returns. I only owe 300k on my house worth $1.1m as well and earn over $275k in cash from my job.
     
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  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Cool - thanks for the detail, sounds like you're in a great position and it sounds like you know what you're doing.

    The thing to remember with discretionary trusts is that they must distribute all income (and capital gains) to beneficiaries in the financial year in which it was earned, or else it will pay tax at the top marginal tax rate.

    So while you aren't expecting much in the way of income returns - if there is a portfolio rebalance which triggers capital gains, you could end up needing to distribute that.

    Of course, if your wife continues to earn relatively little and you use a trust, it would make sense to just distribute that to her (at least on paper) so that you're minimising the tax paid - so the trust can still be useful there anyway.

    It's going to come down to a matter of short term tax benefits from buying in your own name vs longer term tax benefits by being able to stream income (plus a bit of asset protection as a bonus).

    Note that if you're lending money to the trust to invest for you, you basically lose a big chunk of your asset protection since the trust will become a debtor of yours and if you do ever face bankruptcy, that will be an asset the creditors can chase after - so be careful before going down that path.

    As far as other alternatives, I'm not sure whether hybrid trusts are still a thing (many people got burned by them when the ATO started looking carefully at them). But they were good for allowing you to borrow money in your own name (and thus get negative gearing benefits) while investing via a trust (and thus get some asset protection and income streaming abilities).

    You could also look into using a company structure to invest - the company pays tax at 30% (or distributes income by way of dividends to the shareholders). This is often the simplest way to proceed in the situation where you're looking to pay the minimum amount of tax you can while reinvesting - although you lose your 50% CGT discount buying through a company.

    Perhaps even look into whether it's possible to borrow money to buy shares in a company you set up to invest in assets? I'm not sure whether that's a possibility, I imagine the ATO is all over that type of thing - but it's worth asking the question.

    Do you already have a good accountant who can advise you on structuring and tax planning? Where are you located? @Strategic Wealth in Sydney are excellent with this type of setup.

    At the end of the day I think you need to look at what your priorities are. Is it minimising the tax you pay now? Is it minimising the tax you'll pay in the future? Is it asset protection?
     
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  5. Arthurgriffin23

    Arthurgriffin23 Member

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    Yeah they are all really good points. I actually hadn't thought about the company structure idea. I just want to make sure I set it up right from the start. I made some rookie errors buying property so I want to give this a lot of thought. It's quite a tricky business which is why I don't want to rush it. My thinking was that if the shares actually do make decent returns the benefit of neg gearing is negligible and becomes less so as you pay the loan down. Most of the time ppl are quick to take benefits of neg gearing rather than look at the long term game.
     
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  6. Hodor

    Hodor Well-Known Member

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    That is a terrible rate, should be around 4% flat or better these days. That's a 20% saving right there.

    You have a lot of faith in your manager at BT.
     
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  7. Simon Hampel

    Simon Hampel Founder Staff Member

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    Given the loan was probably set up a few years ago, it's actually a pretty decent rate. I just asked a broker, 4.3-4.5% is about average these days for PPOR loans.

    Yes, you could probably refinance to a lower rate (< 4% is possible in some cases) - but at what cost? Also depends on structure in place as to whether that's feasible - fixed loans or cross-collateralised make it a non-trivial exercise.

    Borrowing large amounts of money is about much more than the interest rate - the ability to keep borrowing money is far more important to long term wealth if you're trying to build a large portfolio.
     
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  8. Arthurgriffin23

    Arthurgriffin23 Member

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    Yeah I will be angling for about 4.5% on the loan. I guess I am putting faith in them but they are fairly strictly regulated working for westpac and I get regular updates on how the investment is tracking. Investments have to meet certain criteria so they can't just throw it into speculative stocks. I guess if they don't perform I can move into something else.
     
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  9. Simon Hampel

    Simon Hampel Founder Staff Member

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    Just FYI, most of the people here are very much DIY when it comes to stock selection and don't place much faith in the ability of financial planners or fund managers to outperform a simple low-cost index fund or ETF.

    So while you're after growth, you may want to benchmark the performance of your own portfolio against an index or two - just so you're aware of how well (or badly) they are performing.

    For example, identify a couple of ETFs or low cost index funds which largely match the funds your investing in and "paper trade" them for comparison.

    I do use fund managers myself - but I also actively manage my portfolio (not buy-and-hold-and-pray) and monitor it daily.
     
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  10. Arthurgriffin23

    Arthurgriffin23 Member

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    Yeah good point. I actually was going to put some money in the bennelong fund equity concentrated fund too as this seems pretty solid. I totally get peoples scepticism of fund managers but I don't have tonnes of time to spend researching stock. I am still going to be keeping an eye on it and will reassess from there.
     
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  11. Arthurgriffin23

    Arthurgriffin23 Member

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    I am in Perth - anyone know a good accountant that can help me structure this?



     
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  12. Hodor

    Hodor Well-Known Member

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    I definitely fall into this category.

    Old LICs provide a slightly selective alternative to index ETFs at a very attractive price, certainly cheaper than paying someone to manage your money. Active trading has many headwinds in terms of capital gains taxes and other expenses. As a small investor you do have certain advantages you can take advantage of, consistently having the skills/knowledge/discipline to do so is the trick.

    So I'll admit my comments should be taken with this in mind. There are plenty of people in the past that have outperformed net of fees, they are just a small minority, the odds don't seem favorable to me.

    Absolutely about more than just rate.

    Zeus (and well done) is in a fantastic position, LVR isn't too high and income is strong. Therefore I wouldn't be accepting that kind of rate, we currently have 4.09% variable currently for a refi which was invested into shares as a comparison. I would be getting a second opinion from another broker.

    As for the trust structure I am thinking this through myself, previously we just went in our own names when we purchased. Advantages of compounding in a company with 30% tax (will it be 27.5% shortly?) seem to make that an attractive option, especially if the company is owned by a trust for income streaming in the future.

    Still learning myself, hopefully some food for thought.
     
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  13. Simon Hampel

    Simon Hampel Founder Staff Member

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    I know one person who went the company path to purchase real estate with because they already had a huge portfolio, didn't need to negatively gear and were looking for a long term vehicle to build wealth while minimising ongoing personal tax and they very much looking to hold long term without selling so loss of CGT discount wasn't an issue. The positives outweighed the negatives for them. Land tax thresholds also came into the equation for them too.

    I think an equities based portfolio which may see capital gains (even if just via occasional portfolio rebalancing), would tend to make a company structure much less attractive as an option.

    The advice I was given when I first started investing was to start with the end in mind. What is your end goal? What will the end portfolio possibly look like? Are you going to be earning big $$ forever or can you see yourself changing direction at some point? Is there a possibility you might go into business one day? What happens if you get sick and can't work anymore? What happens when you retire?

    Personally, I like the flexibility that a discretionary trust gives you. You can do all sorts of stuff with it beyond just buying property or shares, including owning the shares in businesses you might start, which gives you a lot more flexibility in income streaming in the future too (and this is how we have things set up ourselves).

    @zeus I don't personally know anyone in Perth who might be able to help, but if you're happy to do stuff remotely (which is perfectly reasonable to do), I think @NickM and the team at @Strategic Wealth would be ideally placed to help you.
     
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