Strategy change advise - utilize 2 tax free threshold

Hi guys,

Need some help/opinions readjusting our strategy please. Couple in early 30's, no kids (planning in year or two). Combined income 190k (110+80). We are in market for upgrading our PPOR and if that happens will convert existing ppor to IP3. currently hold....

2 IPs - higher income earning member
30k of Ins. Bonds - higher income earning member

PPOR (possible 3rd IP) - lower income earning member
60k savings - invested in shares under lower income earning member
30k loan split - ready to be invested in shares under lower income earning member
45k (Savings in progress) - will be invested in shares under lower income earning member

Our plan is to fund 70% off our required passive income from rent of IP's, 20% from dividends of shares and 10% from Ins. Bonds. Super is fallback option. Property bit is going slower
than planned. If we are successful in upgrading our ppor then we'll hit the serviceability limit but planned to reduce our debt from thereon so when cycle turns be ready to borrow more.

Now, soon we'll have 2 additional tax free threshold available to use (Parents joining on permanent basis) and I've been thinking how can i utilize them effectively in tax savings and somehow boost our above plan. They are 60+ and will not be working hence leverage is out of option. There is no super for them here and not eligible for any benefits...

Option 1:

Currently, 60k of shares are under my partner's name (32.5% tax rate). Plus 30k loan is redrawn to be invested in shares as well. We can't do much about 30k loan but wondering if we can liquidate current 60k worth of shares from my partner's name and also use additional 45k savings to invest in shares under parents' name rather than my partner.In that way we won't be paying tax on the dividend plus franking credits will be bonus and that may help boost our original plan. We can make sure my parent's will is updated to reflect that these shares will be passed to my partner after them.

Option 2:

Don't know much about the trusts but family trust was something came to mind. Given our future plans which are yet to realise in number of IP's purchase and building 135k on shares portfolio.
Is this something i should look at further given we can distribute income accordingly plus asset protection.

Option 3:
Leave the plan as it is OR Any other you guys can think of.....

Would appreciate any feedback/suggestions you guys have pls...

Cheers

 

You can’t just invest under your parents names. You have a choice

a) Gift them the money and they invest, or

b) Lend them the money and they invest, or

c) They act as trustee for you (bare trust), or

d) Discretionary trust

Each comes with an entirely different set of consequences.


Option 2 – yes consider discretionary trusts.


Option 3

Debt recycle?

 

Thanks Terry. Regarding

a) Gift them the money and they invest : That is what i was thinking, give them the money and they invest under their name. Needless so say I've to manage it behind doors anyway....it will be hold under their name though...

b) Lend them the money and they invest: Lending them cross my mind....but cannot see how it can work better. I mean they will not have any income to claim their interest...if that's what you were referring to...

c) & d) I am not sure what is the difference....is Bare trust smaller version of Discretionary trust or something....

 

Debt recycling in what way....Nothing in their name. I can recycle some debt or use my savings but not sure of its working....

 

Will you be paying cash for your new main residence?

 

Legal Tip 83: What is a Bare Trust? Legal Tip 83: What is a Bare Trust?

 

no borrowing 80% from bank. Part of my cash will be used as deposit + stamp duty for next ppor purchase. other part of cash will be parked in offset and some will be used to invest in shares....

 

Lending means the money still belongs to you. You have a legal right to get that money back. You can lend at interest or interest free.

 

If you paid down the loan and reborrowed you could still end up with the same shares but you would now have deductible interest and less non-deductible,

 

That is true. However my current ppor will become IP so paying it down and borrowing it will not help plus with this approach i can invest in shares only in my name ( i mean through debt recycling) where I will pay tax. However if we invest in my parent's name they pay no tax plus bonus franking credits....

 

So if I loan them the money (my savings), they pay me the interest, which I'll have to declare as my income where tax is payable....so make sense that i lend them tax free....

Neither we nor them have enough capital to generate income for each of them that can reach their threshold....if we invest 100k in their name with 4% dividend yield + franking....still they'll be no way near the limit. But same money invested in our name will have min 32% going in tax....

 

initially we thought core-satelite approach for shares investment but with this situation i think we may need to focus more on income producing shares.

 

Are they on the pension?

 

No (not even overseas)....they are migrating so no benefits available to them. They are resident for tax purposes though...

 

Thanks @Terry_w ... can you think of anything else regarding strategy than option 1: lend them money interest free and and invest in income producing shares under their names....

 

Heaps to consider. You should seek legal advice before parting with your cash.

 

Agreed. However its the investment strategy & products we trying to sort out currently. Utilizing their tax free threshold seems key to us also not many income producing shares or products currently in market....anything outside of box you can think of..

 

The strategies are something a lawyer can advise you on. These include who should be the lender, the borrower, whether to forgive the debt on certain events happening, what interest rate, interest free, gift and borrow back, etc etc.

 

How will this work for tax purposrs?

Example: use the equity from PPOR to buy share portfolio and IR is 3% and share portfolio divis returning 4% that means earnings are higher than the tax so end of FY I still need to pay tax on the earnings from share portfolio eventhough I have reinvested to balance the portfolio.

My question is around the benefit?

 

Benefit is extra income and capital gains to help pay off the non-deductible debt sooner