# Legal Structure for Investments



## brettc4 (4 January 2009)

Hi All,

I have been  wondering what would be the best legal structure for my investments.
I realise that everyones situation is different, but I was hoping some of the ASF members would be willing to share how they have legally structured their investments and why.

My wage has me close to the 40c tax bracket and with any luck, I will be in this bracket shortly.  And as all doog investors should do, I am looking at how I can minimize the amount of tax I need to pay. Currently my investments are basically equities, but I would likly add direct property to that sometime in the future.

I have been thinking of using a discrentionary trust, which would allow me to split my investment income up between myself, the wife, the child already here and the other on the way.

When using a discrentionary trust, can the trust have a margin loan, or do I as an individual have it? ie who can claim the interest on the loan, to offset earnings.

I am also in accumulation phase for my investments, so effectively want to pour back my investment income, into more investments.  If my total income takes my into the 40c tax bracket, am I better off having a company setup as a beneficiary to my trust. Then any income attributed to it, will only be taxed at 30c.  Can the company then invest the money in the name of the trust?

Who is the best person(s) to discuss this with (lawyer, accountant, financial planner), or are there good resources on the web for this type of thing?

Also for anyone who has set up a structure similar to the one described above, can you tell me how much it cost to set up, and the on-going costs, ie tax returns for the trust and the company.

Cheers,
Brett


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## Sir Osisofliver (5 January 2009)

Brett,

I can answer your questions.

Unfortunately I can't answer your questions without breaking the no advice rule on these forums.

Since you seem to have a reasonable income, and some assets behind you, you might benefit from a trip to a adviser.  Your first stop should be to your accountant to discuss the taxation treatment of what you are attempting to do. Secondly...get another opinion and visit a tax lawyer (remember these guys charge by the hour so prepare and don't be suckered in by half an hour of chit-chat - get straight to brass tacks).

These guys will be able to answer all your questions.

(P.S. I have a company, with multiple discretionary trust structures, and a corporate beneficiary (company as beneficiary of trusts) if the income level of the investments is significant enough you should investigate having a  corporate beneficiary for the imputation credit benefits.)

Cost - was about $3,500 for the above set up in total (2 companies and 3 discretionary trusts) and there is an anually about $2,500 worth of accountant fees each year (It helps when you are in the industry) - In your circumstances you would probably have some additional expenses since you are also talking about superannuation assets.

Good luck

Sir O


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## brettc4 (5 January 2009)

Thanks Sir O.

The information about the on-going costs is helpful for my planning.

Cheers,
Brett


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## GreatPig (5 January 2009)

A few comments, but note that I'm not an accountant or lawyer. This is just my understanding.



brettc4 said:


> I would likly add direct property to that sometime in the future.
> 
> I have been thinking of using a discrentionary trust



One thing to consider with a trust is the land tax threshold. I think it varies from state to state, but in NSW for example I believe there's no threshold for property owned by trusts (ie. the trust pays land tax from the very first dollar).



> When using a discrentionary trust, can the trust have a margin loan, or do I as an individual have it? ie who can claim the interest on the loan, to offset earnings.



If it's a plain DT (rather than a hybrid one) then I believe the trust (trustee) would have the margin loan. To be able to deduct loan interest yourself, you have to have a fixed entitlement to the income, which you don't have as a beneficiary of a DT. For that you would need a hybrid (unitised) trust or plain unit trust, but there have been a number of issues with the ATO recently in relation to negative gearing using HDTs. If you consider going down that path, discuss the issue of unit redemption and CGT on both the units and trust assets with your advisor.



> a company setup as a beneficiary to my trust. Then any income attributed to it, will only be taxed at 30c.



One thing to consider with a company as beneficiary is who the shareholders will be. Once the money is in the company, it really requires dividends to get it out again, which will be income to the shareholders and possibly involve more tax. If the shareholder is a trust, find out about the trust loss provisions and family trust elections.



> Can the company then invest the money in the name of the trust?



My understanding is no. The company is an entity in its own right, and use of its funds by directors and their associates (which would include family trusts) is governed by division 7a of the tax laws. If you want to invest the company funds in any name other than the company name itself, then you should check the div7a ramifications, as the amount could be deemed an unfranked dividend by the ATO. Also remember that companies aren't entitled to the 50% CGT discount.

A few things to discuss with your advisor.

GP


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## brettc4 (6 January 2009)

Hi Great Pig.

Thanks for the information.

I didn't realise it would be so difficult to get the money back out of the company structure.  But your input have given me a number of areas to explore further.

Thanks Again
Brett


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## Sir Osisofliver (7 January 2009)

GreatPig said:


> A few comments, but note that I'm not an accountant or lawyer. This is just my understanding.
> 
> 
> One thing to consider with a company as beneficiary is who the shareholders will be. Once the money is in the company, it really requires dividends to get it out again, which will be income to the shareholders and possibly involve more tax. If the shareholder is a trust, find out about the trust loss provisions and family trust elections.
> ...




GP - this is true - I just didn't want to stun a newbie with reams and reams of information. It's important to therefore have numerous shareholders in the beneficiary company (and any minors you can get in there as shareholders as well) Note however that dividends from the beneficiary company have franking credits attached (because you've already paid company tax)... This option is really only fully utilised however when a significant amount of income is coming through the structure - If the income through the whole structure is going to be $1M ...this will save you tens of thousands of dollars... if the income is less than a $100,000... you wouldn't bother with a beneficiary company.

Sir O


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