Setting up a trust for share and / or options trading

Hi,

I have been reading a book from Tony Melvin and Ed Chan:

Book: How to Legally Reduce Your Tax ... without losing any money! - Knowledge Centre

With no experience whatsoever, apart from reading the books and watching some DVDs, I want to setup a trust for the following purpose:

* Income generation via share trading ( and maybe options trading )
* Beneficiaries are me ( highest income tax bracket ) and spouse ( lower end income tax bracket ) and 2 children ( of course, will not receive any income at this stage until they turn 18 ).
* Trustee is myself instead of a company

Questions:
1) I read about Discretionary Trusts, which allows the income to be distributed to the beneficiary that has a lower tax bracket. But my question is, what if the trust made a loss on share / options trading ? From what I read, it is quarantined to the trust and I could not pass on the loss as a tax deduction to the beneficiary.

So maybe a Hybrid Discretionary Trust would be better ? But can you use a HDT for share / options trading ? Is loss that can be passed on is per trade or per financial year ?

Is the cost of setting up a trust considered a tax deduction ?

Capital allowances: overview

2) I have little money to invest or trade, thus am considering a trust with a personal ( me ) trustee instead of a corporate trustee. What are the implications of changing a trustee later on to a corporate trustee ?

If there's only a few investments when changing the trustee, this should not be too difficult ??

3) Finally, I am not an accountant ... what should one do for book / record keeping ?

 

Hi, I have been watching this post for someone to reply and thou I can't really answer your question I hope you don't mind some of my comments

 

Hi JMS,

Sounds like an interesting read, the only issue is that tax and super laws are constantly changing. Probably good as an introduction to how things can work but whether or not they'll be the same a few months later is anyone's guess.

Cheers,

Dan

 

Just a quick note:

Most likely the Trustee would be classed as an investor for tax purposes (good as you can use the 50% CGT discount).

Then trust formation costs will not be deductible as you are not a business.

Individual trade losses are aggregated with other income - net losses are trapped regardless of the trust structure.

If there is no trust income to distribute then franking credits are lost, and possibly the CGT discount is lost if any net capital gain cannot be distributed to the beneficiaries but is assessed to the Trustee.

It would be worth talking to an advisor about your possible scenarios.

Cheers,

Rob

 

Hi JMS

Sorry for the delay in responding. My thoughts are set out below in.

 

Thank you for all the replies!

My biggest concern really is that I have only around $10K to $15k to invest, and this money will basically come from a home loan redraw ( We have about $20K paid in advance in our mortgage ). I prefer to leave around $5k to the advance so that I am still ahead of my mortgage payments. It is where most of our money is at the moment. Although it is a good way of reducing debt, I am missing out on the other side of the wealth equation .. that is generating income / cashflow.

The amount of money that I will have to spend setting up a trust and corporate trustee will greatly reduce the amount of money that I have. If I setup a trust, that will cost me around $1.5K ... and a corporate trustee instead of an individual as trustee ... another $1.5K ... so I am left with $7k to $12K.

One of my objective is basically to have an additional source of income, either monthly or quarterly.

Frankly, I have been reading a lot ( the books mentioned here, plus some more from "The ASX Way" book series, Graham's book ) since November but have not done anything because I want to get the structure right and pay a reduced tax (perhaps all income to my spouse since she is on a lower tax bracket) on any income I would generate.

However, the other side of me is says that I am missing out on the momentum and experience of learning if I don't start doing something NOW!. Sometimes, I am tempted to just try it out for myself ( e.g. individual, no trust ) with a small amount of money using some of the things that I learned and see how it goes. Yes, I'll pay the maximum tax rate, but since it's only a small amount of money to start with, I guess I'll just chalk that up to "learning cost". And once I am more comfortable, then setup the trust.

So two sides of me are arguing against each other, constantly fighting what to do first / next with the little amount of money to start with. It's like I am trapped in a chicken-and-egg game.

BTW ... they also change their books every year to take into account changes in the tax law. They ( Tony and Ed ) seems to be more focused on investment property ( as they admit that's their forte ), not much on shares, etc ...

The only accountant that I have is the accountant that I see once a year for my personal tax return ( ITP ). Are there "specialised" accountants that can setup trusts correctly specifically for the market ( shares, warrants, options, etc ) environment ? ( e.g. like in medicine, there are GPs and there are heart and neuro-surgeons ).

 

First thing youll be doing if you set up a trust is dumping IPT. I doubt anyone who has done a 4 day tax course would even know how a trust operates....

Be prepared to pay for good advice...

Why dont you consider buying hte shares in your wifes name originally and then consider the trust. If theres only 15k to play with, dont spend 10% on setting it up. If all the distributions are going to go to your wife then theres not alot of point to the trust. Yes you have kidsd which you can distribute about 2600, but if your Wife is on 15% tax bracket then its only $300 per year tax saving. The cost of the trust tax return & maintance would probably be close to that.

 

Good point. That was my thought as well ... buy shares or warrants but under her name. Although how do I explain to the broker that a woman's name is actually "me" ?

 

You can be an authorised representative for her with full power to run the account. Just ask the margin lender about it.

There's nothing like actually doing something to learn...so if you want to just dive in with a SMALL investment to understand the mechanics...go ahead! The great thing about listed securities is they're so liquid and there's no stamp duty to make it costly to move in and out.

Cheers
N.

 

with the internet trading i doubt the broker would have any idea if your a women or not...

 

Thanks. Only question is .. does ATO treat this as "legal" ? Are there precedents or rulings that permit this ?

 

You don't need a precedent or ruling. Your wife can authorise you to act as her agent in instructing your broker to execute trades on your behalf (online or full service brokers all the same). For that matter you can give the investment mandate to anyone at all. (Note though that if there's a fee charged then you'd need to think about whether you're providing a financial service and need to be licensed).

From a TAX perspective, your wife will be the legal owner of the shares and thus will be entitled to the dividends generated and any profits or losses from selling shares.

Cheers
N.