Author Topic: Let's talk trusts and other financial structures  (Read 890 times)

dystopic

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Let's talk trusts and other financial structures
« on: December 11, 2017, 02:07:18 PM »
Hi all,

I wanted to create a space to discuss the best structures for both accumulation and retirement phase, tax and asset protection considered.

We could use my use case as a start but feel free to discuss anything else related to the topic.

Me:
- PAYG contractor earning just over $200k gross
- Second sole-trader income around $25k gross
- Liquid investments (property and super not included as probably not relevant for this topic) - $450k
- I invest around 70% of my net income
- Hardly any deductible expenses above the usual
- In relationship with lower income earner, no kids
- Hit my FIRE already, I'd like to get my liquid assets to $600k or more if the job is right but quite possible I pull the trigger early and do odd jobs and sole trader work only.
- Likely to leave Australia for the retirement phase
- I carry some CGT loss from previous years which could help with the asset transition

What questions should I ask myself to find out whether I should be considering different structures and what the structures would be? Should I earn all my income through a company, where a family trust would be a shareholder and split income between me and my partner? Or set up another company as a beneficiary of the trust?

I would obviously trigger a CGT event should I move the assets but I don't know what number to put on the other side of the equation. Also from CGI perspective better to do this early.

Thanks!

deborah

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Re: Let's talk trusts and other financial structures
« Reply #1 on: December 13, 2017, 03:32:13 AM »
Your case is extremely unusual, and your assets appear to be quite low if the other figures are correct.

To me, the most important piece of information is your planned retirement age. If people are near their preservation age when they plan to retire, or the preservation age of their partner, superannuation is about the best option, especially as superannuation assets are included in divorce settlement outcomes (so it really doesn't matter if you deplete one partner's assets before starting to draw on the other's). If you are quite a bit younger, other instruments are probably more practical.

Notch

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Re: Let's talk trusts and other financial structures
« Reply #2 on: December 13, 2017, 04:03:55 AM »
I canít speak for your situation but Iím in the process of getting rid of my trust and beneficiary company.  Iím changing my asset allocation which will reduce my dividend income from about $20,000 per year to $7000.  With accountant and ASIC fees of about $2000 each year ($1100 trust + $900 company), it no longer makes sense to keep the trust.  Particularly as I donít have any other beneficiaries to use apart from the company at the moment.

Other things to consider:
A beneficiary company must receive the trust distributions itís allocated and cannot lend money back to the trust without charging interest, which really complicates portfolio management.
If Labor wins the next federal election, expect a minimum tax on trust distributions negating their benefit further.
« Last Edit: December 13, 2017, 04:22:57 AM by Notch »

dystopic

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Re: Let's talk trusts and other financial structures
« Reply #3 on: December 13, 2017, 12:18:11 PM »
Your case is extremely unusual, and your assets appear to be quite low if the other figures are correct.

Oh, this is true, maybe I should have mentioned some more key info:
  • I started my MMM journey just over 3 years and was in debt at a time
  • I doubled my income around 3 years ago, it was much lower before
  • Iím about 30 years away from preservation age

dystopic

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Re: Let's talk trusts and other financial structures
« Reply #4 on: December 13, 2017, 05:20:20 PM »
I canít speak for your situation but Iím in the process of getting rid of my trust and beneficiary company.  Iím changing my asset allocation which will reduce my dividend income from about $20,000 per year to $7000.  With accountant and ASIC fees of about $2000 each year ($1100 trust + $900 company), it no longer makes sense to keep the trust.  Particularly as I donít have any other beneficiaries to use apart from the company at the moment.

Other things to consider:
A beneficiary company must receive the trust distributions itís allocated and cannot lend money back to the trust without charging interest, which really complicates portfolio management.
If Labor wins the next federal election, expect a minimum tax on trust distributions negating their benefit further.

Thanks, this is very helpful!

Adram

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Re: Let's talk trusts and other financial structures
« Reply #5 on: December 15, 2017, 12:50:45 AM »
I have a discretionary trust with company trustee. This is almost totally for asset protection purposes as my spouse earns similar to me and we have no children. Although we have foreign relatives that will likely get a distribution.

For FIREES, trusts are a great way to hold assets both during accumulation and after, if you have a high and low earner. You can distribute income to low earner (and kids, a little bit) during accumulation phase, and then split income after FIRE to use the tax free threshholds. If both earning similar income before FIRE, and not worried about asset protection, in joint names would be the simplest and cheapest way I think. In your name alone, not so good.

There are trust setup costs of maybe $1,000 (more if you set up a trustee company also) and ongoing costs that could be between $1,000 to $2,000 per year as Notch said.

This could very well be worth paying if you can run your sole trader business through the trust (although any income earned from personal skills or exertion cannot be split with others due to the personal services income rules) as you would be copping a heck of a lot of tax on that $25K, which depending on how high your spouse income is, could be a big saving. Even without that, distributing the investment income could save you a lot of tax.

This very much depends on whether you continue to earn the $200K salary though. Probably not  worth it otherwise.

You also need to weigh up the CGT cost on transferring assets into the trust but as you said, earlier is better if you are going to do it.

If you are planning on extended overseas travel after FIRE, you would also need to be aware of the rules around trust tax residency. A discretionary trust will become a non-resident trust if central management and control is not in Australia for part of the tax year, or the trustee is not in Australia for part of the tax year. This would cause a capital gains tax event due to the change in residency status but can be avoided by use of a company as trustee, or a yearly visit if an individual trustee, or the use of resident relatives in the control positions while you retain overall control.

Labor's suggested 30% minimum tax on distributions will likely have a way around it, this is pretty much an after FIRE problem, I would imagine using a company beneficiary as a flow through vehicle would work, but I'll worry about that once it happens.

actionjackson

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Re: Let's talk trusts and other financial structures
« Reply #6 on: December 18, 2017, 07:08:53 PM »
That's good intel Adram on the moving OS part.

I'm weighing up setting up discretionary trust.

Income this FY $250k
Spouse income: $80k
No Children yet. Age 33/32 respectively.
$235k in etfs/cash, no property. - ETFs in both USD/AUD, in both US and AUS based brokerage accounts. About 60/40 split US based, AUS based, but no further US based investment, will all be in AUD going forward.

Expected dividend income this FY ~$3k, next year ~$10k, and onward and upwards.
No significant risk of <$200k income really, I've been there for 3 years now.

It will probably not be beneficial this year, but we are planning on Children in the 2-3 year time frame and spouse income will go down, making the prospect more attractive as her income goes down and the dividend income goes up. It occurred to me today that I will probably incur CGT when transferring the assets into the trust, and so if I'm going to do it, sooner rather than later would be better, as in 5 years time the CGT impact could be worse.

Intention is to go back to the US or Europe for either work or extended travel if we FIRE by that point.

The change in residency status is what concerns me - the laws around this seem to be really confusing, and I've had a lot of trouble finding reliable advice from any tax professional in Australia (any tips, let me know). I'd prefer to not have to worry about coming back to Australia for the sake of being considered resident for tax purposes in a trust. If I can set the trust up in a way that avoids any potential future CGT event, even if we travel or move overseas, then that could be highly beneficial.

I'm going to discuss with my father-in-law and father, who both have trusts set up, but they don't really know much about the tax residency / CGT implications.
 
Think I might need to speak to a professional in the know.

Adram

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Re: Let's talk trusts and other financial structures
« Reply #7 on: December 19, 2017, 02:21:45 AM »
Setting up a trust with a company as trustee means that the trust will remain an Australian resident trust, as the trustee will meet the residency test because companies registered in Australia are tax residents.

It just costs more to set up, and for ASIC fees yearly. Does also provide more asset protection though, as an individual is not the trustee. Best practice is to set it up like this, avoids any issues with CGT.

Further reading: https://www.ato.gov.au/Business/International-tax-for-business/In-detail/residency/residency-requirements-for-companies,-corporate-limited-partnerships-and-trusts/

Another thing to bear in mind is whether you will retain your tax residency personally while overseas, as if you are considered a non-resident, trust distributions of unfranked income are taxed at 30%, and you can't get refunds of your franking credits by using the tax free thresholds. There are ways to ensure you stay an Australian tax resident.

Definitely an idea to talk to a good accountant as residency can be a tricky area.

Other possible benefit with distributing investment income to spouse via a trust - might help reduce your division 293 tax on high income earner super contributions if you can get your income down a bit.

Notch

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Re: Let's talk trusts and other financial structures
« Reply #8 on: December 19, 2017, 04:24:40 AM »
Think I might need to speak to a professional in the know.

Personally, I wouldn't bother with it all again unless I won the lotto (bit hard when I don't buy tickets...).

- Maximise super contributions.  Use it and your wife to hold the highest yielding assets in your asset allocation.
- Consider buying a house to live in.  The free rent it pays you is not taxed, and there is no tax on capital gains, and it's not included in pension assets tests, etc.
- If you're planning on FIRE'ing, the lifetime benefit of a trust is diminished as you will soon have a very low income anyway.  But you will always have the accountant fees, etc.


actionjackson

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Re: Let's talk trusts and other financial structures
« Reply #9 on: December 19, 2017, 05:44:51 AM »
- If you're planning on FIRE'ing, the lifetime benefit of a trust is diminished as you will soon have a very low income anyway.  But you will always have the accountant fees, etc.

That's a valid point, although I wonder if I'd be able to work out how to do it myself in the long run to reduce the cost.

I may need to go back to the US for work, so this would also be about preventing a CGT event on my assets if I relocate to the US again for work. That would happen while I'm at the highest marginal rate of tax, so could see that costing me $15-20k vs. had I been able to defer CGT until I'm FIREd and back on the lower marginal tax rates.

I'm not a fan of putting more money into superannuation and not a fan of Aussie property.

As you both mention, worth speaking to someone in the know - the problem is finding them.

Notch

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Re: Let's talk trusts and other financial structures
« Reply #10 on: December 19, 2017, 03:18:03 PM »
- If you're planning on FIRE'ing, the lifetime benefit of a trust is diminished as you will soon have a very low income anyway.  But you will always have the accountant fees, etc.

I may need to go back to the US for work, so this would also be about preventing a CGT event on my assets if I relocate to the US again for work. That would happen while I'm at the highest marginal rate of tax, so could see that costing me $15-20k vs. had I been able to defer CGT until I'm FIREd and back on the lower marginal tax rates.

I think I'm missing something.  If you don't have a trust, how would moving overseas trigger a CGT event?

actionjackson

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Re: Let's talk trusts and other financial structures
« Reply #11 on: December 19, 2017, 08:27:12 PM »
https://www.ato.gov.au/general/capital-gains-tax/international-issues/changing-residency/

If you cease being an Australian resident, or cease being a resident trust for capital gains tax (CGT) purposes, you're taken to have disposed of assets that are not taxable Australian property for their market value at the time.

I read that as, if I have a share portfolio worth $500k, where the purchase price was $400k, and I have a $100k capital gain at the time of ceasing to be a resident, then I will pay CGT on that $100k gain. So I'll be paying that at whatever my marginal tax rate is at that point - where it is likely to be the highest, less the 50% discount on gains for assets held > 1 year, I'd be looking at say (45-32.5)*(100*0.5)=$6250 cost on the 45% marginal rate vs. the rate it would be after FIRE. Assuming I'm not making a fundamental error in my understanding - which I'm not confident in.

Notch

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Re: Let's talk trusts and other financial structures
« Reply #12 on: December 19, 2017, 08:46:43 PM »
I read that as, if I have a share portfolio worth $500k, where the purchase price was $400k, and I have a $100k capital gain at the time of ceasing to be a resident, then I will pay CGT on that $100k gain. So I'll be paying that at whatever my marginal tax rate is at that point - where it is likely to be the highest, less the 50% discount on gains for assets held > 1 year, I'd be looking at say (45-32.5)*(100*0.5)=$6250 cost on the 45% marginal rate vs. the rate it would be after FIRE. Assuming I'm not making a fundamental error in my understanding - which I'm not confident in.
Wow, interesting.  I didn't know about this at all.  Just doing some reading on the ATO website, it looks like you can dodge the CGT event still.

"If you are an individual, you can choose to disregard all capital gains and capital losses you made when you stopped being a resident.

If you ceased being a resident and make this choice, the assets are taken to be taxable Australian property until the earlier of:
ēa CGT event happening to the assets (for example, their sale or disposal), or
ēyou again becoming an Australian resident."


The implication being that if you then dispose of the asset while a non-resident, you will pay CGT in Australia and won't qualify for a CGT discount.  Unless you're in a country with a tax treaty with Australia; then you pay whatever CGT you owe in that country. 

Or you can come back to Australia at some point and then sell the assets and it'll be treated like you never left.

Interesting stuff.  Sounds like you need to see an accountant like you've been saying haha

actionjackson

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Re: Let's talk trusts and other financial structures
« Reply #13 on: December 19, 2017, 09:33:27 PM »
Yeah, I was concerned about it when I moved back to Australia from the US, as I had a fair chunk of US cash.

Turns out that the value of that USD is pegged to the AUD at the date when I moved back to Australia, now if I transfer any back and the USD has appreciated against the AUD, I have to pay CGT on any gain in AUD terms.   

Finding an accountant that knows about these things, but also knows about US tax law etc. is nigh impossible. I had a company pay for PWC to do my returns on the transition over there - which was almost pointless, as you just enter your information into their system and they practically just copy paste it.


marty998

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Re: Let's talk trusts and other financial structures
« Reply #14 on: December 20, 2017, 04:19:40 AM »
Yeah, I was concerned about it when I moved back to Australia from the US, as I had a fair chunk of US cash.

Turns out that the value of that USD is pegged to the AUD at the date when I moved back to Australia, now if I transfer any back and the USD has appreciated against the AUD, I have to pay CGT on any gain in AUD terms.   

Finding an accountant that knows about these things, but also knows about US tax law etc. is nigh impossible. I had a company pay for PWC to do my returns on the transition over there - which was almost pointless, as you just enter your information into their system and they practically just copy paste it.

You may find that the currency gain is treated on revenue account (not capital). It's (very) hard to argue that holding currency is a capital asset.....

Would suggest you consider it unlikely you could access the CGT discount on any currency gains...

bigchrisb

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Re: Let's talk trusts and other financial structures
« Reply #15 on: December 24, 2017, 03:54:07 AM »
Like any decision, do your research and work out if the cost benefit works out in your situation. Using a trust with a corporate trustee has worked in my circumstances.
Most of the pros and cons have been covered already. To my mind they are:

Cons:

Complexity. Different structures give opportunity to optimise between them. But it means you need to be familiar, or pay for knowledge of personal, trust and company tax issues.

Cost. The numbers thrown around are about what it costs me. $1.5-2k a year in accounting, asic and registered office fees.
Residency. Already discussed. Note that for a corporate trustee I believe that you still require an Australian registered office while overseas. My accountant is happy to oblige, for a fee

Sovereign risk. The rules may change, and the opposition is threatening to do so. However the rules are far more flexible than for super.

Tax rates not as low as super in most circumstances.

Trust can only last 80 years, so unless I wind it up, will be something my heirs need to be able to sort out.

Benefits.

Asset protection. Trusts with a corporate trustee provide some protection from litigation and the family court

Tax smoothing and deferral.
The ability to change the beneficiary without a cgt event is one of the major benefits to trusts. This is particularly relevant if you are likely to have variable income years (and store the surplus in a company), or swap between who is the higher income earner in a couple. It really only starts to work if one of a family is on a higher tax rate, and there is a material quantity of asset linked income.

- income streaming across multiple taxpayers

- ability to provide financial assistance to others (parents or kids) in pre tax dollars

My experience.
I started a trust holding an investment in my business about 8 years ago. For most of this time I was in an income around the top marginal tax rate, with investment earnings on top.   It has enabled the following:
- take some business profit as dividends to the trust, rather than taking profits as excess salary.  This shifted some tax to the company beneficiary, saving the difference between my 49% tax rate and the companies 30% rate.  The franking credits also remain in the company. These funds need to be invested in the company, and not personally consumed. To break even while accumulating, I needed to have approx $10k a year of this occurring.
- lower accumulation tax rate. Earnings of investments in the trust and company are compounding with a 30% rate, as opposed to my own 49% rate. Based on a 5% gross investment yield, I needed to have about 210k invested to break even on this alone.
- lower rate during drawdown if earning more that 62k (37k marginal rate plus 25k concessional contribution to spotter). Assuming I'm still reinvesting the surplus, about a 5% spread on the tax rate. Off a 5% yield that's 800k invested to break even.

And that's all without streaming to other people. In practice, I've been ahead on each of these criteria, and substantially ahead on aggregate.
 





actionjackson

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Re: Let's talk trusts and other financial structures
« Reply #16 on: January 04, 2018, 09:28:36 PM »

Cost. The numbers thrown around are about what it costs me. $1.5-2k a year in accounting, asic and registered office fees.
Residency. Already discussed. Note that for a corporate trustee I believe that you still require an Australian registered office while overseas. My accountant is happy to oblige, for a fee


What is the breakdown in these costs? My father has a corp trust and he told me is only like $255/year in ASIC fees. Same with my father-in-law. Their both accountants, so doing their own returns.

What is the registered office fee?

Notch

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Re: Let's talk trusts and other financial structures
« Reply #17 on: January 04, 2018, 09:50:31 PM »

Cost. The numbers thrown around are about what it costs me. $1.5-2k a year in accounting, asic and registered office fees.
Residency. Already discussed. Note that for a corporate trustee I believe that you still require an Australian registered office while overseas. My accountant is happy to oblige, for a fee


What is the breakdown in these costs? My father has a corp trust and he told me is only like $255/year in ASIC fees. Same with my father-in-law. Their both accountants, so doing their own returns.

What is the registered office fee?

For me it was ~$250 for ASIC and the other $1700 went to the accountant.