Author Topic: Let's talk trusts and other financial structures  (Read 4202 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.

Ocean_AUS

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Re: Let's talk trusts and other financial structures
« Reply #18 on: April 19, 2018, 09:03:18 PM »
Hi team MMM

I've been reading for a while, and now trying to push things a little further and get my head more in the investment and tax structures game. My partner and I are trying to figure out the best structure for ourselves, and it seems like a Company + Trust structure might be a good idea.

My partner runs his business work through a company and as a sole trader. We've got 1 child, and 1 more on the way.

Income:
Husband: $90k
Me: $35k (PT) (about to be zero with 1-2 years of unpaid maternity leave)
House: $26k (before expenses - approx $2k)

Assets:
House (currently tenanted): $550k with mortgage $260
Offset a/c (aka cash): $200k

A few questions I'm wondering if anyone out there has some thoughts on, which might be a bit novice-style:
  • Can an existing company be the trustee for the trust, or does it have to be a company set-up for the sole purpose of being the trustee? (ie can we use his existing company)
  • I'm assuming the company could distribute post-tax profits to the trust, and these could then be discretionarily passed on beneficiaries - predominately myself I guess (I don't really understand how/if you can distribute to children). Do those trust distributions treated similarly to "franked dividends"?
[li]Can we transfer our cash over to the trust, and use it to start investing? Are there tax implications for that transfer? Obviously it's better out of the offset account now that the house is tenanted, it's just that we haven't quite got to the next step of figuring out what to do with it!
[/li][/list]

Please let me know if there are some rather large gaps in my grasp of the whole concept, it's highly likely!

marty998

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Re: Let's talk trusts and other financial structures
« Reply #19 on: April 20, 2018, 05:13:27 AM »
Ooof, you really need tax advice for this one @Ocean_AUS


My partner runs his business work through a company and as a sole trader. We've got 1 child, and 1 more on the way.

Both a sole trader and a company? That can't be right. You're either one or the other.


  • Can an existing company be the trustee for the trust, or does it have to be a company set-up for the sole purpose of being the trustee? (ie can we use his existing company)

You can use the existing company - special purpose trustee companies are really only required for Self Managed Super Funds, however there are risks to using a business trading company for passive investment purposes. You may lose access to the small business tax company tax rates and have to pay the 30% rate.

  • I'm assuming the company could distribute post-tax profits to the trust, and these could then be discretionarily passed on beneficiaries - predominately myself I guess (I don't really understand how/if you can distribute to children). Do those trust distributions treated similarly to "franked dividends"?

If you have a company and a trust, and the company is the trustee, then the company isn't distributing anything to the trust. Legally the company would be the owner of the assets within the trust. You need a separate company to hold the investments, with the trust as the shareholder, and the second company is the trustee of the trust. (I need a whiteboard LOL).

Adram

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Re: Let's talk trusts and other financial structures
« Reply #20 on: April 21, 2018, 08:18:23 AM »
Don't use an existing company. Messy and risky. Best practice is that a trustee company does nothing except act as trustee.

When you say can the company distribute post tax profits to the trust, i'm assuming you mean the existing company which holds your husband's business. Firstly, this would be by way of dividends, and dividends can only be paid to shareholders. Passing shares into the trust may mean CGT on the transfer. Secondly, if this income is personal services income which it sounds like it is, it may only be able to be allocated to your husband no matter whether it's passed through the trust or not.

There are no taxation consequences from you transferring your offset money into the trust, apart from any income earned thereafter needing to be distributed to someone.

You need to talk to an accountant directly.

Ocean_AUS

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Re: Let's talk trusts and other financial structures
« Reply #21 on: May 12, 2018, 01:09:16 AM »
Ok got it guys, find a (good) accountant (and also, educate myself a bit more!).

Thanks for taking the time to elucidate. Any recommendations for amazing moustachian-friendly accountants in the Canberra/NSW south coast region are welcome!

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #22 on: July 13, 2018, 06:57:11 AM »
Hi All, this is my first post, so I hope I'm not repeating or wasting time on things already answered.

I am trying to understand more about the workings of a trust in Australia and how it is going to help me with my next stage of life I am now preparing for. I am guessing it is the right way to go, but not entirely sure, and whenever I discuss with an "expert" accountant or solicitor the minute it starts to get a little curly or out of their field of expertise I usually get the "You will need to find an expert on that...". Hey? What? Aren't you the expert I'm asking? Isn't that why I'm in front of you today? Anyway, we all know how it is, so here I am asking for your guidance!

A little background first.

I'm early forties and wife is early thirties. No kids and not intending to have any. I work, she doesn't, however in the coming months this will change to the tune of (hopefully) neither of us working and me being able to make reasonable incomes from US financial markets trading. Consider it our "early retirement". The trading will be enabled by recent profits from real estate (we've decided to get out of Aussie property, except for our primary residence, and 'cash out' so to speak) plus also some other investments made along the way. Bottom line is that we will have approx. 2.8m AUD cash to use for this financial markets trading idea in the coming months and considering it is a juicy amount (and even if I only make 10% profit annually) then the incomes are going to be decent and I need to take them tax effectively as possible.

So the obvious answer is a trust, but I am still trying to work out a few things in the exact structure and workings. I am hoping some questions here and the awesome community can shed some light!

1. Am I right to say a discretionary family trust cannot have the trustee also as a beneficiary? The reason is that I would otherwise intend to be the trustee myself, with my wife and I being the sole two beneficiaries. We might add other family members later or even add a company beneficiary (see related question below).

If I am right I cannot be in both roles, so my assumption is to set up a company (Let's call it Company A) to act as trustee, even though I myself would be the one engaged in performing all the online trading work through my online brokers. I am guessing it is Company A's name that would be the one as listed with the brokers as the client and not me in my individual name? Are my wife and I the shareholders of Company A? Or is the trust the only shareholder of Company A?

2. Given it is my wife and I that currently hold/own the cash, how do we move it into the trust exactly? Do we first transfer it to Company A bank account and it then distributes a dividend to the trust bank account? Or does it get transferred/contributed/donated directly from ourselves to the trust bank account??? Does it have it's own bank account? Or are the funds simply transferred from us personally to the brokers in the name of Company A and the broker is happy to receive in the name of Company A / the trust? Are there any taxes or implications in making such a heavy move of cash into such a company/trust? Are there limits that individuals can effectively "offload" from their own coffers in order to fund a company/trust? Does the govt see it as deliberate tax avoidance because the numbers are so large?

3. Assuming we get the cash into the trust and I have brokers set up in the name of the trust/Company A, I then perform the trading work on a daily basis and hopefully make a nice profit. Let's assume in year one we make 300K AUD profit. My intention would probably be to distribute 87K AUD each to myself and my wife such that we are each only paying circa 25% income tax on this amount. 87k x 2 annually is enough for us to live, enjoy ourselves, go on holidays etc. This is similar to what we spend now given my salary from my job. Maybe we might give ourselves more as time goes by, but this is a good start.

For the remaining 126K of income, this then gives rise to:

A: We would like to keep this in the trust somehow, such that in year two we have 2.8m + 126K to use for our investment activities. Compounding, right? But from my understanding all profits in the name of the trust must be distributed periodically/annually otherwise any remaining will be charged highest marginal tax rate which is not ideal. It would be a shame if in ten years from now we still only have 2.8m to trade with because we haven't really been able to top it up on an ongoing basis because we don't want to pay high tax on this part.

B: If its a good idea to distribute all profits (in order to save paying the highest marginal tax rate), I am assuming that we can distribute this 126K to another company (Company B) as a beneficiary of the trust and that company itself can pay 30% tax on it. This is at least better than highest marginal tax rate plus medicare levy if the funds are otherwise kept in the trust. BUT, what then to do with the profits in Company B? We don't exactly want the profits in our hands personally because we will already have enough on a personal level because of the 87k distribution we each got from the trust. Is this 126k just supposed to sit in the Company B balance sheet and do nothing forever? Or do I then have to set up another broker account in the name of Company B and try to trade on this 126K for further profit? If yes, then that is just trading in the name of a company and we will be forever bound to paying 30% tax on the profits made within Company B and I am guessing we don't really want to grow the accounts of Company B massively. If that were the goal, we would just use a company and no trust right from the outset and just forever pay 30%. It would surely be better if (somehow) this 126k could be taken out of Company B in the same period as distribution from the trust and pumped back into the trust so the trust has the 2.8m + 126k all in the one and the same place for further trading and profit maximisation in year two.

BUT, maybe I'm missing something here and not understanding quite correctly. Can someone help give an opinion/advice?

Summary:
2.8m to manage. Want to make some profits trading financial markets in US (but do the work from Australia) and take tax effective income.
Set up discretionary family trust.
Set up Company A as Trustee of trust.
Set wife, myself and Company B as beneficiaries of trust.
Wife and I take 87k x2 each year from trust as distribution such that we only have to pay 25% income tax on this amount, each.
Company B takes balance of annual profit from trust and pays 30% tax (let's say 88K net profit in company after the 30% tax is paid on 126k distribution from trust). Not sure what then to do with the net profits after tax sitting in Company B? How to use/reinvest this left over portion tax effectively? Can these profits be considered 'franked' and if my wife and I are the shareholders of company B we can then take this 88k without paying any further income tax whatsoever? We could then pump the 88K back into the trust  such that year two trading is playing with 2.8m + 88k ?
I assume that under this scheme wife and I could effectively take the 87k x 2 at 25% tax and franked dividends from Company B (after Company B paid 30%) which would ultimately mean that we shouldn't be looking at anything more than about a 25 to 30% tax burden all up, forever and ever amen?

Am I on the right track and thinking the right way? I'm a little lost!

I'm sure someone here will have the answer in a heartbeat.

Thank you
MSY

deborah

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Re: Let's talk trusts and other financial structures
« Reply #23 on: July 13, 2018, 11:44:20 AM »
Mate, you need an accountant! Just reading through this bamboozled me, you seem to be making everything much more complex than it needs to be. Iím sure you only need one company. Read @bigchrisb journal and/or comments in the Australian Investing thread.

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #24 on: July 13, 2018, 06:49:54 PM »
Absolutely I need an accountant, but therein lies the problem.

I talk to A but he doesn't know about B. I talk to B and he doesn't know about A. I talk to C and he knows about A but not about B.

I honestly have gone through at least six "experts" at this and none of them seem to understand the bigger picture and how to structure for tax minimisation and the minute you start to ask questions they just remove themselves and say "you need to see an expert".

It's frustrating!
MSY

bigchrisb

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Re: Let's talk trusts and other financial structures
« Reply #25 on: July 14, 2018, 02:21:06 AM »
I suspect you are asking too much of those advising you within what they can do professionally.  My simplistic understanding of how our financial planning system works is that an accountant or lawyer can tell you the rules, or interpret how the rules would apply to a specific question.  If they tell you what to do, or indeed give their endorsement to your suggestions, then they are providing financial advice - which they are probably not covered by an AFSL (financial services license) to do so.  Even if they are, or they are a financial planner, the current royal commission stacks-on means that they probably won't provide the advice.  Sure, there are some bad eggs in the financial services industry.  But I suspect the current royal commission is actually doing a significant dis-service to the financial advice that will be provided to Australians (and I don't work in the financial services industry).

Talk to your accountant about the tax rules.  Interpret them to your own situation yourself.  Don't expect someone else to lay out a plan for you, and don't do things that are against the law - the very words "tax minimisation" are something that your accountant / lawyer cannot do.

As to your question, anything you stream in the trust to individuals can stay in the trust (after you have paid whatever tax payable at the individual level).  It basically sits as a loan.  So if you don't need the whole 87k (x2), you can leave some of that in the trust to re-invest.  If you skimp on individual tax by distributing it to the company, you can re-invest it in the company, but yes, its taxed at 30% (or whatever company rate).  Its better than being taxed at 49%.  The franking credits stay in the company too, such that if you ever pay it out as a dividend to yourself, then you will be re-assessed at marginal rates.  You also miss out on any capital gains tax discounts.

Long story short, there is no way not to pay some tax on an income of $300k a year.  You could look at doing the same thing in a SMSF to get to a lower rate, provided you are happy to leave it there until a condition of release.

With all of this, I'm not a finance professional, and this is all just my opinion.  I've chosen to go down the trust/company/SMSF route, because I felt it suited my situation.  Its up to you to figure out what is right for you.  I also wish you luck in your trading endeavors, if you choose to head down that path.  You will probably find a lot of people here view trading dimly, and tend to do more index style buy and hold.  After playing for years with trying to beat markets, I'm also in the buy and hold camp.  Good luck!


madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #26 on: July 14, 2018, 06:36:22 AM »
Bigchrisb, thank you for your response. I have just finished reading through all 17 pages of your journal (took me a few hours today). I really like what you have done and it is a great credit to you for sharing as much as you have, such that it can hopefully help the rest of us.

I guess it is the part of me that wants to get my solution just right for my circumstances, which drives me. Also some circumstances have changed in the last two weeks where I'm suddenly going to have close to 3 mil to play with and I previously was thinking I'd only have about 1m, so I was just going to let it ride on personal income and worry about it at tax time if I really was proving to be good at it. But with this seemingly larger pool of funds available, I know I need to take it more seriously.

I'm not opposed to streaming to my wife and I up to a limit which is reasonably OK on personal income tax (thus the 87k at 25% idea). I'm also OK with paying the balance to a company and incurring the 30%. A key question is what to do from there, with the post tax funds in that company? Invest them on their own in the name of the company? Open a new trading account with my broker and seek further profits? This company would effectively be making money within itself into the future and thus presents the same problem of how to get my hands on those post 30% tax profits and the additional profits it earns itself over the coming years? The benefits need to get to me somehow, and this is the piece I think I'm missing.

Yes, SMSF could also for part of the mix, and considering I've got very little in super (and wife has zero super), this could be an avenue too.

Understood on trading being a dirty word. In fact I enjoy it, doing the analysis, making the decisions, running the trades in the brokerage platform. This is what I am planning to be my "day job" in FIRE. I'm not the type that wants to touch my account up a few times a year and then let it ride with little work/input like the buy and hold camp. Around half the funds will be used for medium term strategies with average hold times around 2 months. Therefore it isn't really going to be much of a dividend driven strategy. The other half of the funds will be in intra-day systems where I'm opening multiple positions in the day and closing out prior to the close. With the work involved, this is why I see this as my new challenge and will consider it to be my job (about 2 hours work a day sounds good to me).

I'm on the Sunshine Coast, so anyone with good recommendations for accountants in the area or even in Brisbane I would be very happy to hear (PM me!).

bigchrisb

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Re: Let's talk trusts and other financial structures
« Reply #27 on: July 14, 2018, 07:53:59 AM »
Long story short, you can defer taxes if you don't spend the money now.  But if you want to spend the money, you have to pay tax on it sometime.  I'm not a big fan of my  tax bill, but if spending 300k a year I could afford some tax.

On optimising for your situation, don't get too caught up in trying to get it just right.  The rules change all the time, so try instead to get it mostly right, most of the time.  Examples?  Super pensions becoming tax free.  Capital gains tax change from indexation to 50% discount. Franking credits become refundable.  Company tax rate for holding companies falling to 27.5%.  No, wait, back up to 30%. Easy to get money into super.  Hard to get money into super.   Each of those changed what an ideal allocation is, and occurred in the last 20 years.  What will happen in the next 20 hypothetically?  CGT discount reduced? Franking non refundable?  Super pensions taxed? Deemed 30% minimum tax on trust distributions?  All of those have been mentioned in the current electoral cycle, let alone the time frame I'm investing for.  Sovereign risk / legislative risk is real, and happens all the time.  I had once heard a high level tax person say that people will always look and exploit the loopholes they find.  The trick is to make sure you change the rules frequently enough that the tax loss is at the margin and not widespread.  I can't guarantee what the future changes will be, but I will guarantee that there will be changes.

On trading, I felt that I'm a smarter than average guy, highly numerical (most of my education and career has involved modelling numbers).  Even with that background, after fees and taxes, my trading has under performed buy and hold - i.e. my time spent on analysis, making decisions and running trades caused damage to my investment return.  It took a fair while to be man enough to measure and admit that.   The areas I manage some consistent out-performance has been in buying things below face value - LICs when trading well under NTA, hybrids when at deep discounts to face value etc. If you go down the trading route, can I suggest you benchmark yourself in post tax terms against an appropriate accumulation index - the RBA publishes data on the ASX200 accumulation index for example.

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #28 on: July 14, 2018, 09:01:15 AM »
I'm fine to pay the tax, just trying to make sure I can defer it or minimise as much as possible, within what is known of the law today and the best view forward of what we should do today to best minimise into the future.

Also understood there is no crystal ball or strategy that will work forever and ever amen, considering the number of changes that are always seemingly at hand from year to year. As long as I can do the right things for today, knowing what we know today, and do whatever I also have to do later at that time, knowing whatever I need to know at that time (even if different from today's understanding) I don't think I would ever beat myself up with the assumption that I'm wrong or "shoulda woulda coulda". I'll do that if I make no plan and go by the seat of my pants and make silly mistakes, but I won't do that to myself if I have made a good effort on planning and execution.

One thing I won't be doing again any time soon? Investing in Australian residential property. I'm just getting out of it this month across multiple properties after a ten year run and I am, quite frankly, over it. It is just too much of a hassle to manage with human issues, capital returns are nothing amazing (and I doubt they are going to be in coming years) and the ongoing/cashflow net returns are just pathetic. It's clearly time for me to be moving on to other things like more exposure to funds, stocks etc. I'll keep my house as PPOR, because, well, I love it and love living in it, but that's all.

I'm not so interested in the Australian markets. They just aren't that exciting in terms of growth recently or of a scale that gets my blood moving. Also all the systems I use, test, analyse, run on the paper trade account just never seem to produce any great results in ASX. US markets seem to be where I can see consistent potential. And this itself seems to be an additional layer of complication for some advisors, because the minute I say "US Stocks" they immediately put the brakes on and disclaim they can't help because they don't have an appreciation for the relevant US law. Fair enough, if you don't have the skills/experience it is ok to not advise, however that still, again, leaves me with the problem of finding it difficult to find the right advisor/accountant that can help me with my dilemma and how best to structure and operate it.

I won't be spending 300k annually. About 150 to 200 on annual basis to keep my life ticking over happily, everyday expenses, holidays etc is all that I need at the moment (and foreseeable coming years). Anything above that I hope to retain in further investments for future growth, but I still remain mindful at some point I'm probably going to say "Screw it all, time to just cash in and start living on drawing down the principle" so I do still need to make sure I put the right plans in motion to have a good end game for withdrawing and keeping in my personal war chest msot tax effectively (important to view the end game and how you will exit right from the beginning, when you are just about to enter). That said, employment income will cease in September and come October is when I have to be established and ready to go with my game plan for my FIRE.

Know of any good "Find me a local accountant/advisor/grand master jedi wizard" resources ?

deborah

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Re: Let's talk trusts and other financial structures
« Reply #29 on: July 14, 2018, 01:44:33 PM »
If you want to invest in the US - a country that has just kicked off a similar protectionist policy to the Smoot-Hawley tariff that effectively made the Great Depression as bad as it was, knocking world wide trade back to one third of what it had been, and is likely to bear the brunt of those policies - youíre going to find it difficult. There are very few people here (in Australia) who have that sort of expertise. No wonder youíre having problems. A US index fund would be easy.
« Last Edit: July 14, 2018, 07:19:04 PM by deborah »

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #30 on: July 14, 2018, 09:14:19 PM »
deborah,

I'm not that interested in funds. I like to do the work myself as I consider that part of my 'job' in FIRE and I've proven to myself I can consistently get returns that exceed those provided by an institutional fund or exchange traded or index fund. I enjoy it, I'm good at it, and I'm able to make money even when markets are choppy/falling, too.

I'm not really a 'set and forget' or 'value' or 'buy and hold' type of fundamental investor. Sure, half of my strategies do involve momentum systems holding positions for two to four months or so, but that's about all and these are ultimately technical analysis driven decision making, not fundamental or discretionary judgement based. I may be bucking the trend here because it seems most others are looking for an easy-street kind of set and forget strategy that will have reasonable incomes trickling in without much concern/work forever and ever amen. Maybe that will come later for me in ten or twenty years, but for now whilst I'm 43 and need something to challenge me instead of being employed by robots, I am very happy and quite enjoy doing the work myself each day as part of my "job". One thing I fear at my age is jumping into FIRE in the coming months and then getting dead bored. Doing the work myself is hopefully going to prevent this somewhat as I will still feel like I have something to occupy me, to keep my hands and mind busy and that I've "done it myself".

As for policy which may affect US markets, I'm not too bothered. There will always be this stuff coming and going. The markets will always rise and drop. There will always be periods of growth, choppy parts that destroy the markets for a year or two. 2007, 2012, 1987, 2000 tech bubble woes. All these are nothing really but a blip that you need to exploit and if you can't get through them, then you probably didn't really know what you were doing in the first place, or didn't plan well enough for them, or didn't test your systems enough, or didn't follow your own rules because you thought you knew better, or thought that "everything will be fine, it's ok, I can leverage myself a little more" (when really you shouldn't have, but you got greedy). 

So if anything, I'm thinking "bring it on" because as above, I have systems that can still make money in those choppy times.

I'm a "stick to the numbers/analysis/system/rules/proofs" kind of trader. I don't use personal/fundamental judgement and I'm completely anal about the transactions to help remove the emotive part. If my systems and analysis and software tells me "for the last 30/20/10 years you should have done X to have the best/smoothest/least risk yet still profitable return" then I am going to have so much more confidence in continuing to do X instead of putting a faith of sorts in my own gut feel in the order of "Yeah but I think it really smells like good value, so I'm going to buy 30K worth today". I understand why people do do that, but that's not me, and each to their own.

Notch

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Re: Let's talk trusts and other financial structures
« Reply #31 on: July 14, 2018, 10:47:58 PM »
1. Am I right to say a discretionary family trust cannot have the trustee also as a beneficiary?
...

I'm not an accountant, but I've been down this path:
- The trustee can also be a beneficiary.
- Once you have a trust deed, the trustee can open a bank account for the trust.
- Transfer as much money as you want to it.  Can be considered a gift or a loan, doesn't matter for now.
- Open a trading account for the trust.
- Trade away.
- Before the end of the financial year, trustee will need to make a resolution to declare which beneficiary will receive what income from the trust.
- All income from the trust must be allocated.  Beneficiaries pay tax on the income assigned to them. 
- There is no need to actually pay out the cash if the beneficiaries are people (although they are legally entitled to it and can sue for it if they really want it). 
- If you have a company beneficiary, the trust must either transfer the income to it or establish a real loan from the company (which makes things way more complicated).
- The company will pay tax but accrue franking credits.  The company can pay a dividend whenever it wants with these credits attached.
 Normally, the trust owns all the shares in the company so it will receive 100 % of any dividends as income, and pass them on with the other normal income to the other beneficiaries at EOFY.

Upsides:
- Ability to split income between people and decide how much to 'earn' each year.
- Access to 27.5/30%??? company tax rate with franking credits.

Downsides:
- More accounts to look after, documents to sign, PAYG tax to pay, accountants to pay.
- Excess income ends up trapped in company until you funnel it back into trust.
- Labor are tipped to win next election and introduce minimum 30 % tax on trust distributions negating some benefits.

« Last Edit: July 14, 2018, 10:53:06 PM by Notch »

marty998

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Re: Let's talk trusts and other financial structures
« Reply #32 on: July 15, 2018, 12:26:49 AM »
@Notch  has listed a couple of items that need a little elaboration:

- The Trustee can be a beneficiary of a discretionary trust, but not the sole beneficiary.
- If you do not allocate all income earned by the trust with a resolution, you do run the risk of top marginal rate of tax being assessed to the Trustee.

I found a line in your post a bit funny @madstacksyo :


One thing I won't be doing again any time soon? Investing in Australian residential property. I'm just getting out of it this month across multiple properties after a ten year run and I am, quite frankly, over it. It is just too much of a hassle to manage with human issues, capital returns are nothing amazing (and I doubt they are going to be in coming years) and the ongoing/cashflow net returns are just pathetic. It's clearly time for me to be moving on to other things like more exposure to funds, stocks etc. I'll keep my house as PPOR, because, well, I love it and love living in it, but that's all.

If you've managed to accumulate $2.8 million then you could hardly say the returns are nothing amazing. Just make sure you set enough aside for the Capital Gains Tax bill next year.

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #33 on: July 15, 2018, 06:20:58 AM »
Marty998, the majority of the funds have not come from investment property gains. The gains I have made are going to be offset a little against prior year capital and income losses, so CGT bill wont be too great (less than 6 figures). Needless to say, the prior year losses have all come from the investment properties alone.

I still stand beside the fact that whilst property may have worked well in some parts of the country and for some periods of time in the last decade or two and for some investors, I am highly doubtful that in the coming years it is going to prove as profitable in those same parts or as in such a short time frame. Oversupply of units, China govt restricting cash flows out of China, mandatory withholding tax for foreign investors (and particularly recent reduction to sales over 750k), pricing at highs in Sydney, no great increases or growth of salaries/wages, net migration controls (compared to previous levels), no real sign of anything juicy or exciting happening in economy, younger generation carrying different attitudes to ownership and how you use housing, short term airbnb etc, plenty of other real estate options in other countries with less barriers to entry and guaranteed yield, availability of funds/indexes related to property, soft retail numbers. All these things don't particularly excite me about spending any money on residential real estate as an investment in Australia any time soon.

Don't get me wrong, I am not speaking doomsday and I'm not one of the preachers who keeps banging on about "oh I can't wait for the 40% overnight correction when the bubble bursts on property and that's when I'll buy". If anyone truly wants this to happen, the flow on effects will be far greater than anything else they need to worry about instead of just trying to snare a cheap house. I think the market will kind of stay where it is, maybe a grow a little, stay relatively flat, certainly single digit percentage capital growth or maybe single digit drops over the space of a year or two only. There won't be any major short term double digit corrections, but its going to be soft going for some times and no major double digit improvements either, I believe. Add that to the absolute annoyance and bullshit you have to put up with in terms of tenants, tenancy authority, agents, maintenance and all the other rubbish in between just to try and get a reasonable cash flow out of it then in my opinion you can certainly do a lot better from the comfort of your armchair without any of the stress.

On the trust, I am still trying to work out if you distribute to the investment company and pay 30% tax, what the funds then do whilst sitting in that company. How do we get them back into the trust account again and start the investing cycle all over again? I think the answer is that you can't, which effectively means you need to simply perform fresh, new investments with the investment company. I am guessing setting up a brokerage account in the name of this company and performing further investments?

It's also confusing about what the end game looks like. What happens in ten years if we want to dissolve the trust, dissolve the investment company. What is the end game in getting the funds out of these vehicles at that time, in a most tax effective manner.

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #34 on: July 15, 2018, 08:34:26 AM »
As I read more and more, I think I am working out the best uses/functions of Company B as a beneficiary and how it would function on an ongoing basis.

If end year 1 the trust has made 300k profit and we decide to distribute 87k to myself, 87k to wife, 126k will remain and is paid through to Company B.  Company B pays 30% income tax and 88k remains in the Company B.

Commencing year two the trust has the same starting capital of 2.8m to work with on the investments it performs. Company B also now has 88K it can invest in whatever it likes. In this case I would have a second brokerage account and perform further income producing trades. I guess that doubles up the admin work for me with the brokers, but oh well, cant win 'em all.

At end year two, let's say trust made 250k this year. 87k goes to myself, 87k to wife. 76k remains and paid to Company B. Company B pays 30% and net 53K remains. Meanwhile, company B made 10K income from its own investments during the year. It pays 30% tax on that 10K such that 7K current profit shows. Along with the retained earnings from prior year of 88k plus the 7k current profit plus the 53k net from this years trust income, Company B now has 147k on the balance sheet to play with and invest into year two. Trust has the same 2.8m to play with into year two.

So this cycle keeps going into perpetuity, until....

... along comes disaster year in the fifth year where the trust makes a net 150k loss because of poor market conditions. For that year, no distribution is able to be made to any beneficiary from trust and the loss will be carried forward to following years. Perhaps at that fifth year, Company B could well have 400k on hand. It then decides to pay a dividend to myself and my wife because, quite frankly, we need money to live this year and the trust wasn't able to pay anything so our taxable income is otherwise zero. We take 145k each and effectively pay nil tax due to the franking credit applied from the tax already paid by Company B (if I am right my quick play on the ATO income tax calculator says a 145k income will result in 41,282 tax plus 1.5% for medicare which would mean we would usually have to pay 43,457 which is close enough to 30% of 145K) but because of the franking credit from Company B having already paid 30% income tax this will offset this tax payable on a personal basis, to zero.

So if I am right I think this is painting the picture for me that Company B's benefits come in the form of still being able to invest in something in the meantime with funds that have only been hit by a 30% tax rate, and also act as a bit of a buffer for when the trust doesn't go so well and the usual distributions are lower than expected and I can then take some distributions from Company B to weather the storm in that year.

Am I on the right track?

bigchrisb

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Re: Let's talk trusts and other financial structures
« Reply #35 on: July 15, 2018, 01:46:44 PM »
So this cycle keeps going into perpetuity, until....

... along comes disaster year in the fifth year where the trust makes a net 150k loss because of poor market conditions. For that year, no distribution is able to be made to any beneficiary from trust and the loss will be carried forward to following years. Perhaps at that fifth year, Company B could well have 400k on hand. It then decides to pay a dividend to myself and my wife because, quite frankly, we need money to live this year and the trust wasn't able to pay anything so our taxable income is otherwise zero. We take 145k each and effectively pay nil tax due to the franking credit applied from the tax already paid by Company B (if I am right my quick play on the ATO income tax calculator says a 145k income will result in 41,282 tax plus 1.5% for medicare which would mean we would usually have to pay 43,457 which is close enough to 30% of 145K) but because of the franking credit from Company B having already paid 30% income tax this will offset this tax payable on a personal basis, to zero.

So if I am right I think this is painting the picture for me that Company B's benefits come in the form of still being able to invest in something in the meantime with funds that have only been hit by a 30% tax rate, and also act as a bit of a buffer for when the trust doesn't go so well and the usual distributions are lower than expected and I can then take some distributions from Company B to weather the storm in that year.

Am I on the right track?

That's the general principal I've been operating on.  However the difference for me was while I was earning a paycheck, funnel the money into the company, and let it compound at 30%.  Then pay it back to myself when I'm in lower earning years (in my case because of not working).   

Notch

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Re: Let's talk trusts and other financial structures
« Reply #36 on: July 15, 2018, 04:56:29 PM »
So this cycle keeps going into perpetuity, until....

... along comes disaster year in the fifth year where the trust makes a net 150k loss because of poor market conditions. For that year, no distribution is able to be made to any beneficiary from trust and the loss will be carried forward to following years.

I don't think trust losses can be carried forward. 

The only way to use them is to pay a dividend from the beneficiary company to the trust in the same financial year.  If the dividend income is equal to the trust loss, the trust will have no taxable income to distribute, and you will have freed some cash from the company (though you will have burned some franking credits in the process).

Also, if you're worried about actually having cash to live on:  with a discretionary trust that you have loaned money to, you can retrieve cash at any time with no impact.  Cash out =/= taxable income.
« Last Edit: July 15, 2018, 04:59:05 PM by Notch »

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #37 on: July 15, 2018, 09:06:16 PM »
Notch, I think your idea of a dividend back to the Trust from the Beneficiary Company can only work in the event of the trust being a shareholder of the beneficiary company. From my understanding, this is somewhat frowned upon and is a red flag for the ATO because it is effectively, in ways, running your monies in a loop just for tax benefit. Some advice I have been given is that to remove this flag, set my wife and I as the shareholders of the beneficiary company.

I hope I don't get stuck with too many lossy years in the trust. Whilst I understand I should be able to take funds from trust tax/problem free at any time in those years, I don't think I would really want to because I want the balance to be maximised for future earnings. Still, if there are no funds left in the beneficiary company we may have no choice.

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #38 on: July 15, 2018, 09:11:35 PM »
On the SMSF topic, because I currently only have 100K in my super and my wife has zero, being we are both 20 and 30 years away from preservation age, we are thinking each year when Trust (hopefully) makes profit, we do something like:

Trust makes 300k profit.
87k paid to me. Pay personal income tax.
87k paid to wife. Pay personal income tax.
25k paid to my super. (15% tax???)
25k paid to wife super. (15% tax???)
Balance of 76k paid to Company B. After 30% tax Company B has 53k on hand.

The 25k idea is obviously the annual maximum for each of us. When balances of super get closer to 300k or so (in ten years or so) that is when we bother setting up SMSF (because right now, with such low balances the active management as a SMSF, costs, complexity etc each year probably aren't worth it).


Notch

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Re: Let's talk trusts and other financial structures
« Reply #39 on: July 16, 2018, 03:28:48 AM »
Notch, I think your idea of a dividend back to the Trust from the Beneficiary Company can only work in the event of the trust being a shareholder of the beneficiary company. From my understanding, this is somewhat frowned upon and is a red flag for the ATO because it is effectively, in ways, running your monies in a loop just for tax benefit.

That's how my trust and every other one I've encountered is set-up.  I don't think it's frowned upon unless you are recirculating the company income back as dividend each year, generating a massive recycle loop.

madstacksyo

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Re: Let's talk trusts and other financial structures
« Reply #40 on: July 17, 2018, 09:53:52 PM »
Here's another question for the peanut gallery...

Residency. If it is that I may in one given financial year decide to spend a month in US with friends, a month in China with wife's family, a month in Greece relaxing and eating. If this all happens end to end and we spend perhaps a good three or four months straight outside the country, and during that time I still, on a daily basis, log into my accounts and perform my trading work electronically. How does this have a bearing on the residency status of the trust in Australia?

Does this mean it is a good idea to have a company as the Trustee and not a person, such that the residency of a person does not affect the potential residency status of the trust?

Or does this not matter and no matter whether the trustee is a person or a company and no matter where they are in the world, the trust itself will always retain Australian residency (and therefore tax) status? And then to the extreme, I decide to go and live in greece for eight or nine months and only keep australia as a summer holiday home? This would ultimately mean I am not a resident of australia anymore as more than 183 days outside the country and principle place of residence in another country.

deborah

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Re: Let's talk trusts and other financial structures
« Reply #41 on: July 18, 2018, 10:45:59 PM »
deborah,

I'm not that interested in funds. I like to do the work myself as I consider that part of my 'job' in FIRE and I've proven to myself I can consistently get returns that exceed those provided by an institutional fund or exchange traded or index fund. I enjoy it, I'm good at it, and I'm able to make money even when markets are choppy/falling, too.

I'm not really a 'set and forget' or 'value' or 'buy and hold' type of fundamental investor. Sure, half of my strategies do involve momentum systems holding positions for two to four months or so, but that's about all and these are ultimately technical analysis driven decision making, not fundamental or discretionary judgement based. I may be bucking the trend here because it seems most others are looking for an easy-street kind of set and forget strategy that will have reasonable incomes trickling in without much concern/work forever and ever amen. Maybe that will come later for me in ten or twenty years, but for now whilst I'm 43 and need something to challenge me instead of being employed by robots, I am very happy and quite enjoy doing the work myself each day as part of my "job". One thing I fear at my age is jumping into FIRE in the coming months and then getting dead bored. Doing the work myself is hopefully going to prevent this somewhat as I will still feel like I have something to occupy me, to keep my hands and mind busy and that I've "done it myself".

As for policy which may affect US markets, I'm not too bothered. There will always be this stuff coming and going. The markets will always rise and drop. There will always be periods of growth, choppy parts that destroy the markets for a year or two. 2007, 2012, 1987, 2000 tech bubble woes. All these are nothing really but a blip that you need to exploit and if you can't get through them, then you probably didn't really know what you were doing in the first place, or didn't plan well enough for them, or didn't test your systems enough, or didn't follow your own rules because you thought you knew better, or thought that "everything will be fine, it's ok, I can leverage myself a little more" (when really you shouldn't have, but you got greedy). 

So if anything, I'm thinking "bring it on" because as above, I have systems that can still make money in those choppy times.

I'm a "stick to the numbers/analysis/system/rules/proofs" kind of trader. I don't use personal/fundamental judgement and I'm completely anal about the transactions to help remove the emotive part. If my systems and analysis and software tells me "for the last 30/20/10 years you should have done X to have the best/smoothest/least risk yet still profitable return" then I am going to have so much more confidence in continuing to do X instead of putting a faith of sorts in my own gut feel in the order of "Yeah but I think it really smells like good value, so I'm going to buy 30K worth today". I understand why people do do that, but that's not me, and each to their own.

I have been debating whether to respond, and have finally decided to do so.

I have known others who have little experience, but are sure they can consistently get better returns than professionals running professional funds. They were lying to themselves. They were really gamblers. Almost all the professionals understand that they have a hard time doing better than index funds. Even Warren Buffet says that his wife should go into index funds when he dies.

You say that your experience is in real estate, not equities, yet you are prepared to gamble your entire stash on a strategy that you have little experience in. And you intend to do it as your retirement job. Surely you can find a more interesting retirement job!

Itís a good idea to invest in areas you already understand. Your working life gives you experience in how a particular investment segment works. Investing in an area of strength is far better than investing in something that you have little experience in. One reason @bigchrisb likes LICs is that his work experience matches this type of investment, so he can spot opportunities. I like shares for similar reasons, but most of my stash is in index funds and other investments that are quite safe. @Ozlady likes real estate. Each of us is building on our experience and strengths.

If youíve done badly in real estate, when there has been huge opportunity, and have little experience that matches other types of investments, going for index funds is a pretty safe way of investing. But nothing is without risk.

Itís your choice. Use 10% of your stash to gain expertise over 10 years with something you want to do, but donít risk your whole stash to gain expertise.

bigchrisb

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Re: Let's talk trusts and other financial structures
« Reply #42 on: July 19, 2018, 02:17:25 AM »
One reason @bigchrisb likes LICs is that his work experience matches this type of investment, so he can spot opportunities.

Technically, REITS/commercial property for me rather than LICs, but the point is 100% valid!