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Possible investment strategy. Input required

Discussion in 'Investing Strategies' started by Heavy, 4th Jun, 2008.

  1. Heavy

    Heavy Member

    Joined:
    4th Jun, 2008
    Posts:
    9
    Location:
    Sydney, NSW
    Hi everyone,

    I am planning on making some changes in my finances and would appreciate any input. My future intentions are as follows.

    I am planning on developing an investment portfolio with some like minded individuals. We are looking to invest in a variety of shares and property for the long term. All of the investments will be purchased for their income producing ability and are not intended to be sold at any stage. The investment properties are to be held in a Property Investment Trust while the shares and other investments are to be held in a Unit Trust. We plan on creating a company (that we are directors of) to act as Trustee to both of these trusts to eliminate the vesting date of the trusts.

    From here, I would like to have control of my portion of the income. To do this I intend on setting up a Discretionary Trust that is a beneficary / unit holder of the investment trusts, and having my current and future immediate family and a company (to direct income to in the instance that the 30% company tax rate is less than ours) as beneficiaries of the DT.

    Note: Assume that our main concern is the long life of the whole structure and that our respective powers can be passed on in a tax effective manner.

    Now for the questions:

    1 - Must the first company (trustee of investment trusts) have shareholders? If so, should this be the like minded individuals and myself, or could the Unit Trust be complete shareholder in order to simplify things?

    2 - Can the second company (beneficiary of my Discretionay Trust) also be the Trustee of the same to make it easier to pass on the power of Trustee?

    3 - Am I missing anything at all that changes the viability of any part of this structure?

    I encourage you to contribute any thoughts, concerns and recommendations you have even if it doesn't relate to the questions.

    Thank you for any help and input.
    Heavy
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    I hope you are talking about investing some serious sums of money - otherwise the administrative costs of running so many structures will significantly eat into your profits.

    I'm not an accountant or structures expert - so these are just general personal observations:

    1. the trustee company will have shareholders - these shareholders would vote for a board to be elected to govern the trustee's actions (ie manage the trust investments)

    However, the shareholders don't have to be people - you can have any structure actually own the shares - and it is the people who have ultimate control over each of the shares who actually get to make the votes. For example, if you and your spouse were joint shareholders in a company which was trustee for a trust which owned the shares in the company which was the trustee for the investment trusts - then you would both have to come to an agreement as to who you would vote for in electing people to the board. In other words, if your trust held 5 shares in the investment trustee company, then between the two of you - you effectively have 5 votes (not 5 votes each).

    The whole point is that it is the trustees who make the decisions about what the trust invests in and how it manages those investments - and if the trustee is a company, then it is the shareholders in that company who determine who is in control of the company (ie a board of directors).

    And if your shareholding is via your own trust, and you have your own corporate trustee, then it is the shareholders of your own trustee company who determine how to operate your trust (which in practice is just you and your spouse, assuming you are both shareholders and directors of your trustee company).

    2. I'm not sure about a trustee being beneficiary of the same trust - but even if you could, I don't think you should - trustee companies should not own assets.

    3. costs and administrative headaches are the main problem. You need to make sure everyone has a clear understanding of how the structure works, who has control, how you make decisions, how you deal with conflict, etc.

    I'm pretty sure you would have to limit it to no more than 20 investors too - otherwise you'd need to issue a PDS.
     
  3. Heavy

    Heavy Member

    Joined:
    4th Jun, 2008
    Posts:
    9
    Location:
    Sydney, NSW
    Hi Sim,

    thanks for your reply. Yes I know that this system seems overdone but I felt that it was the most effective way of achieving our goals. This post is also to ask if anyone knows of another solution that would have the same results. I have read some books and done my fair share of internet research although everyone seems to be regurgitating the same basic information. You helped me to understand some issues about the trusts that I couldn't find anywhere else. Namely the transferring of power through the structure. I now see that even if the Unit Trust was able to have ownership of its own trustee company's shares that it is not at all effective nor necessary and how this should now be done. I also assumed that because I would be the one creating the companies that I would automatically be appointed as a director. I stand corrected. Thanks for clearing this up.
    Also just to give reason to the somewhat elaborate structure there will be approximately 7 to 8 investors within a year more down the track. We will be investing in the vicinity of $20000 ea. p.a. for the first few years and then increasing this amount as the system becomes well established and we have any hiccups out of the way. Thanks again for the insight.
    Heavy