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Who should hold the fund?

Discussion in 'Managed Funds & Index Funds' started by GregB, 20th Aug, 2007.

  1. GregB

    GregB New Member

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    Hello All. Excellent and informative forum. I have a question about managed funds and margin loans used together as an investment tool.

    Currently my wife and I earn similar amount (me $66k she $58k). In the next couple of years my pay will go up considerably due to fixed increases and expected promotions to say $85k in 5 years time. My wife's wage will remain fairly flat but we are hoping to have kids in about 1.5 - 2 years time (all going well) and for my wife to not work for about 5 years. So she is going to be an almost zero income earner over 5 years and when she does start working again will be on a lower tax bracket to me (maybe considerably lower if she starts back part time).

    We have $60k to invest in managed funds and will be looking to gear this to about 50% with a margin loan. Now my question is, in who's name should we take the loan and invest in the fund? Joint, my wife or me? The two competing factors here are the tax write-off on the interst and the tax incurred from the fund's distributions. Should it always be in the name of the lowest income earner since you always expect to make a net return? Does it depend on the type of fund? I can see some benefit in me being geared into a buy and hold fund where the capital gain is unrealised and I hold off realising that capital gain until I retire (say). So to have an average 50% gearing, we could gear to a high ratio in my name for this type of fund but then gear to a lower ratio on a higher growth less tax effctive fund in my wife's name.

    Two things i cannot imagine being possible but I will ask just in case: Is it possible to transfer fund ownership? Is it possible to have a margin loan in one partners name and fund ownerships in anothers? (feel free to laugh).

    Am I simply concerning myself about something that will make little difference in the end?

    Any general advice appreciated, but if it is a little too specific, I will take advice to visit an accountant with good humour.

    Cheers

    GregB
     
  2. Simon

    Simon Well-Known Member

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    Here is an idea.

    Buy funds in your wife's name. Use them to secure a margin loan in your namewith which to buy more investments - perhaps to match what your wife holds.

    You will be overall geared to 50% but you yourself will have 100% of the debt. As the equity rises then borrow more.


    I use Leveraged equities and they will take secuity over a spouses holdings.

    Just an idea - I am no expert and wouldn't dream of being your advisor :)
     
    Last edited by a moderator: 20th Aug, 2007
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    Simon's on the money, but get some tax advice to ensure the interest you incur will be tax deductible as it won't be earning assessable income for you if it's held in your wife's name.

    Cheers
    N
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You'd need to do the sums to work out whether the cost would make it worthwhile (possibly not if these are the only investments you have), but a discretionary trust gives good tax planning ability since you can choose who gets the income from the investments - ideal if you have one spouse on much lower income for a while.

    Just a suggestion of something else to consider.
     
  5. craig

    craig Member

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    ... and your children when you have them or nieces and nephews.

    Craig.
     
  6. voigtstr

    voigtstr Well-Known Member

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    and then do you take the money off your kids and wife to buy the boat for a few hundred k :)
     
  7. GregB

    GregB New Member

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    Thanks for the suggestions. Will look into the costs associated with the trust and see if it suits what I need. Thanks Simon and Nigel also, some food for thought.
     
  8. Rob G.

    Rob G. Well-Known Member

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    3 issues for unsophisticated investors using trusts:

    1. Difficulty of gearing makes things a bit contrived

    2. Losses are trapped in trusts - important if speculating or gearing in volatile times

    3. You rely on other's legal & taxation advice to keep you out of trouble -usually means higher costs & paperwork burden

    Just factor this into you calculations.

    Cheers,

    Rob
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I've never had any difficult gearing in a trust - there are plenty of options which are no more expensive than non-trust loans. You just need a good mortgage broker.

    Margin loans are no different either - other than a slightly higher application fee to cover deed checks by solicitors etc.
     
  10. Leandro

    Leandro Well-Known Member

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    That's interesting Nigel, if all you are doing is using your wifes funds as security, why would you be able to have a deduction. You are taking a new loan for investment purposes, and then claiming the interest.

    That aside, if you take this approach aren't you back to the same situation with the higher earner receiving income and having to pay a higher tax rate?
     
  11. Simon

    Simon Well-Known Member

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    The wife's funds are irrelevant for tax purposes.

    ie you have $50K. Buy her $50K worth of MF.

    She assigns them as security to your margin lending account. She receives income and pays tax accordingly. She has no interest bill.

    You buy $50K worth of MF using $50K from your margin lender. You have income which is offset partly by interest on the $50K you borrowed. You are geared 50% LVR because you used your wife's holdings as partial security.

    So now she gets the most income as she is a lower taxpayer.

    You get all the interest deductions for money borrowed to buy MF in your name.

    I hope this is a better explanation - using an example often helps a lot.
     
  12. Leandro

    Leandro Well-Known Member

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    Yep, i totally understand that.

    But why would you want to have this situation, sure you get the tax deductions but you are also getting income. And since the managed fund is making you money even after the deduction, it would still be better to be in the lower earner's name. Am i missing something in your logic? :confused:
     
  13. Rob G.

    Rob G. Well-Known Member

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    I think you are asking if you can stream income to one & deductions to the other ?

    Very hard outside a common law business partnership.

    Heck, even discretionary trusts can only stream net income.

    Otherwise, negative gearing favours the higher rate taxpayer but what about it becoming positive in the future, and CGT on disposal.

    But you may have other objectives - e.g. estate planning may be better with joint ownership (in equity at least) so the asset passes direct to your partner and is not available to your creditors ?

    Cheers,

    Rob
     
  14. Simon

    Simon Well-Known Member

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    Was trying to get you the best compromise.

    This way you get to gear into double the investment and maximise the efficiency.

    What else do you want from your venture?
     
  15. Rob G.

    Rob G. Well-Known Member

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    Absolutely ...

    You get to risk someone else's money and claim your costs.

    Talk about double-dipping !

    As to whose name to hold - even when positively geared the value of deductions is higher for the higher tax bracket which offsets somewhat the higher tax on the income. Don't forget you need taxable income to claim most deductions & offsets. Also, borrowing in the higher earner's name reduces the costs due to being a lower credit risk.

    You can still use deductible super contributions & salary packaging of fringe benefits for high income earners quite effectively.

    There are other benefits of having a low income member - such as spouse & super co-contribution, Family Tax Benefit B, Low Income Rebate., ...

    It really depends on your situation & objectives etc. Tax should not be the only driver.

    Cheers,

    Rob
     
  16. Leandro

    Leandro Well-Known Member

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    I am pretty sure that the goal of moving an investment into your spouse's name is to reduce tax paid.

    What i believe following your instructions would result in is less tax paid than if held in the higher tax bracket individuals name solely, but more than if held completely in the lower tax bracket individuals name.

    GregB example with your strategy;

    * Wife invests 60k and has no other income
    * Husband invests 60k which is borrowed against wifes investment. He is in 40% bracket and earns 85k.
    * Fund returns 10% in a particular year.
    * Margin loan is 9.25%

    * Wife declares income of 6k and pays no tax.
    * Husband earns 85k salary + 6k fund income, total 91k
    * Has deduction of 5550 so total is now $85,450
    * Tax is $21,280.

    Total tax paid = $21,280

    With standard place loan in wifes name strategy;

    * Wife has 12k of fund income.
    * After deduction her income is $6450, which is in the 15% tax bracket and needs to pay $67.5
    * Husband has salary income of 85k.
    * Pays $21,200 of tax

    Total tax paid = $21,267.5

    This is why i don't understand why you would want to do this, as it is more complicated and you are paying more tax! This would be magnified if the income pushed the hustand into the 45% tax bracket.
     
  17. Simon

    Simon Well-Known Member

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    I must admit to not running figures just offering a different idea. But it is a big difference ...

    Did you do the sums with different returns and also considering franking credits??
     
  18. Leandro

    Leandro Well-Known Member

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    The returns are the same for both examples. I didnt include franking credits, but if we have to get to that detail to make the strategy work shouldn't we be questioning whether it is worth it?

    I know the difference is small in this case, i just wanted to go through the idea and see if it seemed to be a better option.
     
  19. Rob G.

    Rob G. Well-Known Member

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    Using last years rebates because I am too lazy to search:

    By having $6k income in the wife's name, a loss of about $1430 in Dependant Spouse Rebate, or about $353 lost in FTB B if dependant kids.

    By having $6450 in wife's name, a loss of $1542 Dependant Spouse Rebate, or about $461 lost in FTB B if dependant kids.

    Also, I ignored the fact that the bank might charge a higher rate for a loan to an unemployed person even if their spouse acts as guarantor ??

    Moral: If you are going to divert income to the low earning spouse then make sure it a lot to offset your loss of rebates & concessions.

    We have ignored the very real advantages of holding assets as joint tenants from an estate planning point of view.

    Cheers,

    Rob
     
  20. Leandro

    Leandro Well-Known Member

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    But if you add that $6k to your income and you are earning 85k you will be paying an extra $2400 in tax. So you are still better off having in wifes name and forgetting about the concession, unless you have more deductions to bring down your income.

    Nope, same rate.

    How would it affect estate planning?