Author Topic: Structures for Australian investing  (Read 5238 times)

JonathanJ

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Structures for Australian investing
« on: September 20, 2013, 06:29:46 AM »
I am a 31 year-old Australian Mustachian and my family (wife and 2 kids) and I have just reached our first financial milestone of paying off our home mortgage. We saved and invested for the house deposit, with the focus the last 3 years on paying off the outstanding mortgage.

My question is to get some advice on tax-effective ways to invest in shares etc. in the Australian environment. My initial thoughts are to maximize my concessional contributions to Super (up to $25k for me) and invest in index funds in my wife's name as she is working part-time and has a lower income. I've read some of bigchrisb's posts about Australian company/trust structures but not sure if there is benefit in my case. A summary of the various options is at http://www.investors.asn.au/education/investment-basics/investment-structures/

To summarise our position + income:
Home equity = $400k in an offset account
Super = $100k me, $30k wife
My income, approx $100k pre-tax
My wife's income, approx $30k pre-tax
Tax is approx $25k for me and $5k for my wife.
The last 3 years, we've saved 65% of our after-tax income, so approx $65k per annum.

At our current savings rate, we will be close to FI in around 8 years, with income-producing assets around $850k (including Super but excluding house). Whichever investment structure we go with would work best if eventually it can split the dividend/other income between both myself and my wife.

steveo

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Re: Structures for Australian investing
« Reply #1 on: September 21, 2013, 02:11:20 AM »
I'm not sure where to point you to for advice but I'm 40 and I won't have my house paid off for another 3 years. Myself and my wife also only have $175k in Super. I think you are doing really well.

I intend to complete the following steps:-

1. Pay off the mortgage.
2. Max out super payments (this will be a maximum of 50k per year which I think is prior to being taxed).
3. Invest in a Vanguard index fund with all remaining savings money in my and my wife's names only - i.e. no tax beneficial investing.
4. Retire in about 10-12 years.

I think all of the above is achievable however I think you have to be concerned about how much your kids will cost you and how long you will have to support them. I have 3 kids ranging from 2-12.

Maybe there will be some good advice with regards to tax beneficial investing which I would also like to hear however I think if you receive dividend income and your income drops when you retire the tax benefits might not be a big issue.

JonathanJ

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Re: Structures for Australian investing
« Reply #2 on: September 21, 2013, 06:49:24 AM »
Thanks for the feedback - I'm planning on talking with an accountant about this soon, but thought it was worth a post here too. My thoughts are that while we're saving, it is better to have any interest/dividends taxed with my wife's income (at a lower rate) but then if we stop working we both would have a tax free threshold.

Good luck with your future plans too - we'll see if any Australian MMM readers have some good advice.

superannuationfreak

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Re: Structures for Australian investing
« Reply #3 on: September 22, 2013, 03:04:10 AM »
Congratulations on paying off the mortgage!  Do you ever think you might rent your current place out or will you only ever live in it/sell it?  One other potential saving if you're paying monthly fees for your mortgage and offset account is to refinance with a 'basic' interest-only home loan (typically no monthly fees) then pay it down to $1000 or $100.  You'll pay minimal interest on that, there are often special offers where a bank will pay your refinance costs, and you'll still have access to redraw in case of emergency.  But the caveat is that if you might want to rent it out in the future then I gather you won't be able to claim loan interest after you redraw as a tax deduction.

I'm certainly not a tax expert so check with an accountant and get what professional advice is needed.  But my 2c nonetheless based on my investigations to date:

1) Definitely worthwhile to salary sacrifice the maximum into Super.  After-tax contributions I have mixed feelings about particularly if one wants to retire early.
If you don't yet have a Mustachian (i.e. low-cost, good value) Super fund then I list the best options I've found so far on my blog:

http://superannuationfreak.blogspot.com.au/2013/07/the-best-deals-in-superannuation-in.html
http://superannuationfreak.blogspot.com.au/2013/07/the-best-deals-in-superannuation-in_31.html

I'm paying less than 0.5% p.a. and only that much because I'm maintaining multiple funds as my current employer has an exemption from Super choice legislation.

2) Dividends from Australian companies (and funds holding Australian companies) are often fully/partially franked, which essentially means some or all of the tax paid by the company is usually available to Australian residents as a credit at tax time.  This can be useful both in Super and for your taxable investments.

3) Vanguard managed funds (those that are more like the US mutual funds) are too expensive in Australia!  If you plan to put a fair bit in (and it seems you do) then Exchange Traded Funds may be a more cost-effective option.  The Vanguard Total Australian Market ETF is actually the same underlying fund as their standard managed fund option, just the reporting might not be as pretty and the fees are 0.15% p.a. instead of 0.9%p.a.

I list some other Managed Fund/ETF options on my blog too (bottom line is if you're comfortable with ETFs and are making sizeable investments then Vanguard and other ETFs are definitely less expensive options than Vanguard managed funds.  And even for managed index funds, Colonial 'Wholesale' can be surprisingly cheaper than Vanguard, particularly if you choose a personal asset allocation)
« Last Edit: September 22, 2013, 03:20:08 AM by superannuationfreak »

idjces

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Re: Structures for Australian investing
« Reply #4 on: September 22, 2013, 03:50:15 PM »
Good question regarding tax structures

From what I have read, it doesn't matter what structure you use to generate the income, if you want to spend it, you end up paying income tax. Id like to hear others opinions, but i've initially given up on the idea. Likewise for additional super contributions that I can't touch before 60?

I thought the whole idea is income to spend in early retirement :)


Personally I have been accumulating shares in my name. 4-6% franked dividends which should beat a flat ~5% mortgage.

These were just initial thoughts. You obviously have more room to benefit, being in a higher tax bracket, plus spousal income
« Last Edit: September 22, 2013, 11:43:59 PM by idjces »

AdrianM

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Re: Structures for Australian investing
« Reply #5 on: September 22, 2013, 08:14:38 PM »
Hi Jonathon,
Congrats on paying off the home loan, feels great to be debt free doesnít it.

My personal situation is similar to yours, wife and 1 kid, Home paid off.
We earn $70k pre-tax each
We have $100k in an SMSF

The number we put on financial freedom was income of $20k each annually. With that in mind we chose to buy them as individuals as you donít pay any tax on income up to $18k, from there to 37K its 19% tax.
 
If you are going down the road of a SMSF make sure that the SMSF is owned by a corporate trustee and you and your wife are a director of the trust. Cost a bit more for this structure but will save you a lot of pain in the future should you need to make any changes.

JonathanJ

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Re: Structures for Australian investing
« Reply #6 on: September 23, 2013, 06:20:34 AM »
Hi superannuationfreak - I have just started checking out your blog - it's an interesting read :)
To answer your questions - there's no fees associated with the offset account - it's already an interest only loan but thanks for the suggestion.
That is interesting about the Vanguard funds in Australia - I've previously used the Vanguard global fund and also the SSgA StreetTracks ETF fund (a few years ago when it was the only Australian ETF around!) I'll have to do some more reading there. The main reason that a fund would be better is that we would likely be making $5k monthly deposits or even split across funds, where brokerage + bid/ask spread can be expensive, although I'd have to run the numbers. Psychologically, I find it easier to save if it's coming out automatically rather than using a brokerage account where the temptation is to time the market :)

One other point on Vanguard - it looks like they have a tiered structure, where the first $50,000 is at 0.75% for the Australian shares fund, then 0.5%, then 0.35% above $100,000, and 0.18% p.a. if you get to $500,000 (Becomes a wholesale fund).
https://www.vanguardinvestments.com.au/retail/ret/investments/managed-funds-retail.jsp#fundstab

Cheers,

Jonathan

JonathanJ

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Re: Structures for Australian investing
« Reply #7 on: September 23, 2013, 10:12:36 PM »
Hi Adrian,
Thanks for the info too - the option of setting up an SMSF is definitely something I want to investigate in the future, maybe once we've built the balance up a little more.
A couple of questions:
  • How much does it cost you in terms of admin/yearly fees to run the SMSF?
  • Do you have Death/TPD/Income Insurance through your SMSF? Who do you use for that?

I agree about splitting the income in retirement to take advantage of tax-free thresholds. My only other thought is whether it is worthwhile to have the extra overhead of a discretionary/family trust to allocate income each year. I think only $416 can be credited to kids now, before penalty tax rates kick in, but maybe useful if it is uncertain who will have an income in any particular year.

For the info of international readers, the Australian tax rates are below:

Australian Tax Rates

Taxable incomeTax on this income
0-$18,200Nil
$18,201-$37,00019c for each $1 over $18,200
$37,001-$80,000$3,572 plus 32.5c for each $1 over $37,000
$80,001-$180,000 $17,547 plus 37c for each $1 over $80,000

Jonathan

AdrianM

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Re: Structures for Australian investing
« Reply #8 on: September 25, 2013, 06:21:31 PM »
Jonathon,

Our super cost us about $1500 in fees a year. We don't have any complex setups so that keeps the overheads down.
Our super fund has aus shares, int shares, term deposits and cash.
I would argue that $100k is enough to safely cover expenses of running it, but always keep an eye on what the fees are and shop around.

As for the insurances, we use Tower insurance, they are the underwriters off most insurances you will  be offered. We found that we could greatly reduce the cost by again shopping around (the insurer stayed the same Tower).
The other thing is TPD and income insurance we have dropped. I was retrenched and we tried to claim income protection, but was told they don't cover that. Also we choose to discontinue TPD as we saw no value in it, due to a strong family support network.
As for life we just have $100k cover on each of us. We did have more when we had a mortgage but now that we are debt free, we believe  $100k is enough.

Adrian

bigchrisb

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Re: Structures for Australian investing
« Reply #9 on: October 02, 2013, 11:31:29 PM »
You have hit on a pet topic of mine - and I see you have already read a bit on what I've done.  I've been pretty quiet on MM, but still active in my saving/investing.

My current structure and rationale is:
- Salary sacrifice the maximum (25k/year for my age) into my SMSF.  I own my highest yielding shares here, with income quarantined at the 15% tax rate.  This is slated as my "old man" money, with a goal of being able to fund my life from age 60 onwards.  No gearing here.
- Holding company.  I pay part of my income (about $70k/year pre-tax recieved as a dividend) into this company via the trust.  This all gets invested in stocks (mostly higher yielding ones, dividends reinvested). Its quarantined at the 30% tax rate, and the franking credits stay on account that I can draw down if I have lower income periods before I turn 60. The main advantage of this is lower immediate tax rates, and shifting income from a high tax rate period of my life to a lower tax rate period. No gearing here.
- Own name.  I own mainly low yielding stocks in my own name (largely international ETFs, lower yielding Aus stocks or Australian shares with BSPs).  Lots of gearing here, and deductible margin debt.  Paying down this margin debt is a focus for me.
- Family trust.  Once I get my margin levels under control, I'll be adding new investment in the family trust.  That way I can stream tax deferred and capital gain distributions to me, and regular income to the company.  If my family mix changes later, I can then stream income to whoever the lower tax party is.  That's important, as that may not be the same person in 20 years, as when I'm buying the assets.

I suspect that you might get some longer term benefits from investing through a family trust - it will mean you can split that income at your discretion in future (i.e. split it evenly to both you and partner once not working), as opposed to buying directly in your partners name (and having the future income all stuck there).  It also offers some benefits of asset protection, both from external claimants (someone sues you for something), and internal (your partner and you may live happily ever after, but you can guarantee that most divorcees felt the same way at some stage through their relationships).  It also helps with capital gains management if you are wanting to leave something after you pass away (depressing thinking about that in your 30s)