Structure used to invest in shares

In a nutshell, yes. I retired at 41 though whilst the wife as the higher income earner kept working to 51. I gave up my career so she could pursue hers involving moving around Aus and overseas.

Some assets were owned in own name (eg PPORs -> IPs) in addition to assets in DT and HDT. We progressively moved assets / sale proceeds into the SMSF as I approached preservation age. I commenced my SMSF two pensions a couple of years ago at 55 (now 57). We're now focused on increasing the wife's Super balance through transfer of shares (another Crash please), 3 yr bring forward NCC contributions, personal contributions, spouse split etc given that she reaches preservation age in 4.4 year's time.

The vast majority of what we've done was based on my own decisions including structures, Super and tax strategies so I'm sure things could have been done somewhat better in hindsight. I rarely seek advice, I do my own research. Been burnt too many times. This year I will grudgingly see a Super expert given the mess the Gov't has created with Super just to confirm the future strategy I've decided on is optimal and my understanding is correct. I now feel quite comfortable with my knowledge of the Super changes though. And of course I'll get them to do the paper work. I focus on strategy, not paperwork.

But for us having the option to retire early guided our investment priorities early on. If you lock all your money away in Super then in most cases you've lost that wonderful option to retire early. And remember even if you're younger and think that you never want to retire early there are many events in life that can cause a change of view. Hence why I think having assets outside Super is so important, it gives you that extremely important thing called CHOICE!

Not advice.

 

Thanks for sharing @austing!

We'll be doing similar thing accumulating dividend paying shares in DT. I'd love to have that choice one day which hopefully comes sooner rather than later as I don't see myself working till 60.

 

This info on super has been really helpful @austing thanks again. It has made me appreciate my super as a background investment. Although it is a long way away from when I get to pension age, but with a current employer contribution rate of 21% and the fund value at $200k with me being only 28 years old, it has kind of taken the pressure of having to solely rely on my other investments to get me through my entire retirement.

 

Thanks @austing once again a very informative post.

Please let me know if I'm mistaken:
- Distributions from discretionary trust will still be taxed the same regardless of whether I am "retired" or not.
- Trick is to get money into super just before retirement (the time I can access super) while minimising the CGT kick to the nether regions.
- I can leave a certain amount in trust to pay me tax free $18k with the remaining income from super.
- There is a $1.6 million restriction/ tax incentive on how much I can put in super.

Thanks in advance.

 

I'm not a tax expert so the following answers are very generalised.

Yes, but when you're retired and have no employment income you get to take advantage of the tax free threshold. I won't go into the Seniors tax offset.

Yes, but new rules and caps will make it harder to accumulate a large balance in Super if you leave it too late.

Yes.

Without going into a lot of confusing detail you are, at preservation age, limited to commencing a maximum "tax free" pension of $1.6 mil. Any excess over that stays in the accumulation account taxed at 15%.

A simple strategy currently possible:
1. Max out tax free thresholds outside Super. Could be from assets in Disc Trust.
2. Max out $1.6 mil tax free Super Pension.
3. Get as much into Super accumulation account in excess of Super Pension taxed at 15%.
4. What you can't get into Super, use structure to minimise remaing tax eg Trust + Company etc.
5. Franking credits are your best friend. Choose your investments well.

Tax and structuring experts will be able to expand further. I've deliberately avoided going into Super detail as it can get complicated. Even many of the experts are still confused with the mess the Gov't has created with Super.

 

I thought it would be best to ask my question here instead of starting a new thread.

Shortly I'll be buying around $50k worth of LICs with a focus on dividends and low fees. It's a long term focus and I'll be adding funds on a consistent basis. Starting with the end in mind regarding structure, I understand the flexibility a discretionary trust would give for my wife and I from a distribution and taxation point of view. However, in the short term the annual compliance costs on a small initial asset value (~$50k) go against my strategy of buying low cost shares.

I'd be willing to accept this as a short term issue only until I build the asset base. Howerver, my wife and I have also started a business in the last 12 months with a discretionary trust/corporate trustee structure. Assuming the business profits are at a level above what the shares will return, we already get the flexibility from that set up, so I'm questioning the benefit of buying the shares in a trust given the associated costs.

So my (long-winded) question - does our business structure essentially take away a major benefit that buying shares in a trust would give us (i.e. the flexibility of distributions)? I know there are other factors to consider, such as asset protection and succession planning, but I'm asking this question purely from a tax/distribution/flexibility point of view.

 

Yes it does to some degree as you could possibly divert the income from the business to lower tax paying entities to make up for the fact that the distribution of income from the shares must go to the legal owner.

But also consider future capital gains tax and further investing if you end up buying more and more shares.

If you ran the business via a company with the shares owned by the trustee you could potentially have used the same trust.

 

Not sure I understand this Terry.

If the business structure has 'Co. Pty Ltd' as the trustee for 'Family Trust', who would need to be the shareholders of the company to use the same trust for investment purposes?

 

I mean if you operated as a company in its own right, you could have the trustee of the trust being the shareholder.

 

Got it, I think. The trustee holds shares in the trading company on behalf of the trust? So compliance costs are reduced because you only have one trust instead of two (slightly offset by having a second company). And profits from the trading company go through the trust to the beneficiaries, which also holds the shares (and distributes dividend income). Is that what you mean?

 

What are your long term plans? I have two discretionary trust/corporate trustees structures that I use - one for running a business and one for various investments. At the moment 90% of my income is in the business trust, but over the next X years I hope it will flip around to be 90% in the investment trust. And then in retirement the business trust will disappear and the investment trust will provide lots of flexibility for income distribution/capital gain distribution. I see it as being worthwhile.

Regards,

Jason

 

You only would need one company potentially and one trust. Trust is shareholder if trading company. Same trust also owns share on asx. Trust distributes dividend income to beneficiaries

 

Thanks Terry. Is that meant to say 'Trust is shareholder of trading company'? In this scenario, who is the trustee?

 

I don't know - but it could be you.

 

Hi @pippen,

The extra flexibility you mentioned by investing in your name as well, is that purely because of the ability to participate in discounted SPP's in both names?

Cheers

 

Hey mate,

The main reason for the additional lic's invested in my partners funds is the ability for the funds to compound in a lower tax environment (instead of using more costly trust structures)

If I'm on 39% tax rate and my partner is on 19% tax rate for the next 5 years for instance the fully franked div amounts can compound faster in her name compared to mine as well as down the track planning planning planning if all I'm vestments were held in my name whilst still working all div income would be in my higher earning name while if my partner is sitting at home I'm foregoing a lost opportunity to minimise tax legally whilst compounding my returns and spreading out investment income between us both!

It's not a perfect plan but don't see myself retiring at 40 etc so am utilising super, and investing out of Super in my and my partners name in addition to a paid off ppor and hopefully down the track mayne get an IP and follow the wog principle of paying it down P+I style whilst building cash buffers.

 

Would it make sense to buy shares only in your partner's name because of all the reasons you mentioned? I'm currently doing that - buying shares only in my partner's name as she's on a lower income.

However I'm thinking it might be a good idea to buy small parcels of big lics in my name as well, so when discounted SPP's arise both of us can participate.

Sounds like I'm in a similar situation to you. I can also choose to do additional super contributions with 5.8% employer matched contributions. However I opt to invest outside of super instead to give myself the choice of earlier retirement, if l choose to. I figure this flexibility would be such a stress reliever.

 

Yes I do both, I get the company match as well as filling up my out of Super account! Have had some lic's and couple blue chips and employee shares in my name for a while and just drip feed into these lic's In my name whilst turbocharging my partners account which holds a couple lic's! So I aim for instance to get around 5 k per year each in 3 to 4 lic's within the next 4 to 5 years and then let compounding do its thing!

So that's the sole reason why I still put some funds into my name but only a little per year through spp.

 

Also what if something happens to me down the track and I end up being the lower income earner! Things happen life changes so I guess it makes sense to cover these issues so I can sleep at nyt!

 

I was ideally looking at implementing this strategy i.e have a lump sum that I wanted to pay onto PPOR mortgage then take a LOC and purchase LIC's in trust structure I asked my accountant about this he advised me the LOC would also need to be in the trust's name to be able to claim the interest paid as a tax deduction and still claim tax benefits of trust income distribution .. so I called my financial institution and asked them if they would do the LOC in a trust name and they said it would need to be in the names that are on the loan..

At this stage am just thinking of taking the LOC of credit in our names then down the track once dividends become not as tax efficient maybe using contribution limits to transfer some assets into super as I want to continue to slowly borrow more as dividends increase and we pay don more of PPOR.. maybe I am overthinking it and should just try to keep it simple