# Best tax structure for investor?



## jpldavis (3 March 2009)

Hi,

I was wondering if anyone could advise me on the best tax structure for a 'long' investor?

I'm wondering whether I should invest under some form of company or as an individual.

Also, if the former, what type of structure is most appropriate?

If it has any bearing, I am in a high income tax bracket...

Many thanks

James


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## MS+Tradesim (3 March 2009)

*Re: Tax Structure for Investor*

The most effective structure for tax residents of Australia is generally a discretionary trust with a company as trustee and a beneficiary of the trust. The trust retains CGT discount benefits so for long-term investing you can take advantage of the 50% reduction in assessable gains. For the trust, you can add as many beneficiaries as you like, including charities, other trusts, companies and individuals. Being discretionary, the trustee has complete determination on how to allocate distributions. Beneficiaries should be maximised when establishing the trust. Adding or deleting down the track may invoke tax consequences. Beneficiaries of a discretionary trust have no right to any of the earnings of the trust so you may have some in the list to whom you never make a distribution - but it's better to have a larger list of beneficiaries, some never used, than to need them down the track and have to add them which may be complicated and expensive.

Income (*not* capital gains) that would result in you paying top marginal rate, can instead be distributed to the company (trustee and/or beneficiary) which pays a rate of 30%. Both earnings and franking credits can remain within the company or be distributed out to you (or other shareholders) in years where your income might drop for some reason and reduce you to a marginal rate lower than 30%. You can also establish different share classes in the company to allocate different dividends. 

Essentially, you can set up extremely flexible structures - all perfectly legal.

This is just a quick overview. Talk to an accountant about your particular situation and what would best suit your needs and objectives.


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## jpldavis (3 March 2009)

Thanks. I'd definitely want to talk to an accountant about that!

At what level of investing would this become important (ie. 20K in the market, 50K, 100K upwards?)


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## awg (3 March 2009)

While the previous answer is a good one, it would depend on your assets and age.

IMO the best structure if over 55 is a super pension, as tax is very concessional, if over 60 = 0. 

If nearing 50s(or any age), super is still 15% taxed

there are obviously costs in setting up and administering both SMSF and Dis Trust, U can work it out as a % of asset balance.

ATM reducing non-deductible mortgage would also appeal


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## MS+Tradesim (3 March 2009)

Good call, awg.

I always forget about super because I'm still young and want access to all my money but super certainly has strong advantages in some cases. 

jpldavis,

It will depend on your objectives. If you're only ever going to be dabbling with a few grand then forget it. If you want it to grow and grow, then it could be worth your while. In the early days it might cost an excessive amount to run (yearly tax returns for trust and company, annual company fee etc) proportionate to earnings but as you grow it will pay for itself by multiples.


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## Stormin_Norman (3 March 2009)

being young i have private companies and have the clause in them that allows the companies to give me interest free loans, rather then drawing dividends.


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## prawn_86 (3 March 2009)

Stormin_Norman said:


> being young i have private companies and have the clause in them that allows the companies to give me interest free loans, rather then drawing dividends.




How much did these cost to set-up Norman? That sounds like something i want to do eventually


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## Stormin_Norman (3 March 2009)

$330 i think it is.

add slightly extra if u get the loan clause from a lawyer. i recommend just doing it via an online one.

all up under $500.


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## MS+Tradesim (3 March 2009)

Prawn,

If you know what you're doing you can download the appropriate docs off ASIC and send them in with the incorporation fee which is a few hundred bucks.

If you _basically_ know what you're doing but want a little help with the process this website will help you out for a fee. http://www.incorporator.com.au/
There are probably others that are cheaper. I've just found this one useful.

If you have no idea, see an accountant or solicitor who will happily charge for the process.


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## Stormin_Norman (3 March 2009)

i use : http://lawcentral.com.au/

Div 7A Loan Agreement is the section u want to include in your company's constitution.


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## MS+Tradesim (3 March 2009)

That looks like a great site stormin. I like their prices.


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## kincella (3 March 2009)

those structures worked better in the 'old' days...when individual's tax rates were higher, and company tax was higher

today you can earn 180,000 as an individual and pay tax at 31%, compared to a company at 30%..plus the filing fees and need for an accountant etc

companies dont have the benefit of capital gains tax concessions

some people set up companies without knowing the full picture....cause their friends did it....then find themselves stuck with annual fees and costs....

if you are on a high income...you can afford to pay for  'good advice' its not that expensive....any of the middle tier accounting firms...will give good affordable advice....


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## MS+Tradesim (3 March 2009)

kincella said:


> those structures worked better in the 'old' days...when individual's tax rates were higher, and company tax was higher
> 
> today you can earn 180,000 as an individual and pay tax at 31%, compared to a company at 30%..plus the filing fees and need for an accountant etc




If that's all you want to earn, sure, stay as an individual.



> companies dont have the benefit of capital gains tax concessions




But trusts do.



> some people set up companies without knowing the full picture....cause their friends did it....then find themselves stuck with annual fees and costs....




Agreed. Very bad idea. People should pay for advice from a relevant professional before making decisions.


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## Stormin_Norman (3 March 2009)

can anyone recommend a good, fair priced accountant who knows both taxation laws and also about australian's ownerships of overseas countries and repatriating dividends back to australia?

oh in brisbane would be extra good; unless theyre personally known and are happy to talk via email till i can travel down.


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## MS+Tradesim (3 March 2009)

Bentleys - Bruce Auld.
http://bris.bentleys.com.au/index.cfm/Home

They're part of the worldwide Praxity group who have a member firm in Hong Kong:
http://www.praxity.com/?flow=Membership&subflow=Search&country=China


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## CanOz (3 March 2009)

Stormin_Norman said:


> can anyone recommend a good, fair priced accountant who knows both taxation laws and also about australian's ownerships of overseas countries and repatriating dividends back to australia?
> 
> oh in brisbane would be extra good; unless theyre personally known and are happy to talk via email till i can travel down.




PriceWaterhouseCoopers

You should be able to afford them Norm

CanOz


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## Stormin_Norman (3 March 2009)

MS+Tradesim said:


> Bentleys - Bruce Auld.
> http://bris.bentleys.com.au/index.cfm/Home
> 
> They're part of the worldwide Praxity group who have a member firm in Hong Kong:
> http://www.praxity.com/?flow=Membership&subflow=Search&country=China




have you experienced them yourself?


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## MS+Tradesim (3 March 2009)

Bentleys Bris are my accountants. In my experience they've been helpful, extremely informative and great at arranging tax - legally. I know how much they've saved me so far. 

Initial consultation was free. What I learnt in that session was worth a mint. Have all your questions organised and ready to go and the initial session alone will probably be invaluable.


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## Stormin_Norman (3 March 2009)

thank you greatly sir. i will contact them.


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## prawn_86 (3 March 2009)

kincella said:


> today you can earn 180,000 as an individual and pay tax at 31%, compared to a company at 30%..plus the filing fees and need for an accountant etc




What sort of write-offs etc are you talking here though? Isnt the top tax bracket 45%?


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## GreatPig (3 March 2009)

*Re: Tax Structure for Investor*



MS+Tradesim said:


> with a company as trustee and a beneficiary of the trust.



I don't think it's a good idea to have the trustee company as a beneficiary of the trust. You want to keep the trustee as a $2 company with no assets, for asset protection reasons, so distributing profits to it would defeat that aim.



> Beneficiaries should be maximised when establishing the trust. Adding or deleting down the track may invoke tax consequences.



Beneficiary specifications can be general, like "all grandchildren", so that new-born ones in the future are automatically included.



> You can also establish different share classes in the company to allocate different dividends.



You can, but you need to be wary of the Part IVa dividend streaming provisions.

GP


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## Stormin_Norman (3 March 2009)

Over $180,000 - $58,000 plus 45c for each $1 over $180,000.

58,000/180,000 = 32.22%


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## MS+Tradesim (3 March 2009)

prawn_86 said:


> What sort of write-offs etc are you talking here though? Isnt the top tax bracket 45%?




He/she's basing it on the effective rate:
http://www.ato.gov.au/individuals/content.asp?doc=/content/12333.htm&mnu=42904&mfp=001/002

Income bracket: $80,001 – $180,000	
Tax: $18,000 plus 40c for each $1 over $80,000

Tax on $180k works out to an effective or nominal rate of 32%. $18000 paid on the first $80k + $40k on the next $100,000 = $58k. 58/180 = 32.2%

But this is short-sighted. An individual still pays 40% on every dollar from 80k up to 180k. If the money earned in this bracket had instead been earned through a trust/company structure it would have been distributed to the company and only had 30% or 30k tax paid. That would work out to be an effective rate of 26.6% and would be a tax saving of $10,000. Deduct a few grand for accounting fees etc, you're still ahead.

--------------------

GreatPig,

It was general advice. The nuts and bolts of it need to be worked out by jpl with his accountant *should* he decide to go that road.


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## GreatPig (3 March 2009)

Stormin_Norman said:


> i have private companies and have the clause in them that allows the companies to give me interest free loans, rather then drawing dividends.



I would be interested to know how they do that. Div7a is fairly specific about what you can and can't do in this area, and most things would result in a deemed dividend.

From memory, loans have to be with a minimum interest rate of the one they prescribe (somewhat higher than the offical rate), and paid back over a limited period as P+I. A no-interest loan must be repaid in the same financial year, and can't simply be repaid on 30th June and taken out again on 1st July each year.

GP


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## GreatPig (3 March 2009)

A couple of other things to consider about distributing to a company if you don't expect to take the money out for some years:

1. How are you going to invest the money you've distributed to the company? This money is now company funds, and subject to the relatively strict company rules like Div7a. If you invest in growth assets within the company itself, you lose the 50% CGT benefit. If you transfer to another personal entity, you have Div7a concerns. Investing in income assets or running a business would probably be okay though (eg. a share trading business).

2. If the government lowers the company tax rate in the future, you may lose the ability to distribute all the franking credits, resulting in an effective higher tax rate on those funds. If they follow the rest of the world (except NZ) and get rid of franking credits altogether, uh oh...

GP


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## beamstas (4 March 2009)

I'm an accountant, down in Tasmania!

This thread caught my attention, but reading through it most of what i was going to say has been answered. 

What i will suggest is that instead of making a decision from friends/people at online forums (no offence about your advice guys), i would advise you to go and speak with your accountant. He should be able to set you up with a company or trust with no hassle from you at all, whilst also taking into account your personal situation and financial position.


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## jpldavis (5 March 2009)

Thanks guys. I appreciate all the help and of course would follow my accountant's advice before proceeding.

I guess my issue at the moment is that my investment activity/portfolio value is pretty small fry, but with plans to steadily increase over time.

Theoretically, what are the downsides/legal implications of holding investments 'personally' for now, and then later on down the track, when it becomes more important to tax plan effectively with regard to these, to simply transfer these holdings to my new trust structure? Would I have to sell these at market price to the trust (and therefore have unnecessary CGT implications possibly), or could I simply transfer them over with no serious issues?


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## MS+Tradesim (5 March 2009)

jpldavis said:


> Theoretically, what are the downsides/legal implications of holding investments 'personally' for now, and then later on down the track, when it becomes more important to tax plan effectively with regard to these, to simply transfer these holdings to my new trust structure? Would I have to sell these at market price to the trust (and therefore have unnecessary CGT implications possibly), or could I simply transfer them over with no serious issues?




It would essentially involve selling at market price to the trust so you would have CGT events.

What I did was just close out investments held personally as exit triggers occurred and then buy new ones through a trust. It took a few years.


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## beamstas (5 March 2009)

Simply do an off market transfer

http://www.sraa.com.au/forms/form23.pdf

You will have a capital gain, but no cash will actually change hands.


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## MS+Tradesim (5 March 2009)

Bearing in mind an off-market transfer while not involving cash still triggers a CGT event and you may have to pay tax personally on the 'gains'.


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## beamstas (5 March 2009)

MS+Tradesim said:


> Bearing in mind an off-market transfer while not involving cash still triggers a CGT event and you may have to pay tax personally on the 'gains'.





I said you'll still get the CGT.
There is no way of getting out of it. The best thing you can do is wait until the market drops, (ie now) to transfer the shares over. That way your capital gain will be minimal personally, and as the share prices rise the gains will be stuck in the company (remember no discount)


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## MS+Tradesim (5 March 2009)

beamstas said:


> I said you'll still get the CGT.
> There is no way of getting out of it. The best thing you can do is wait until the market drops, (ie now) to transfer the shares over. That way your capital gain will be minimal personally, and as the share prices rise the gains will be stuck in the company (remember no discount)




Yes, you did say 'capital gain' but I was just adding clarification on a point that confuses some people who think because no money changes hand then no tax is payable.

And if, hypothetically, he transfers to a trust, he can still access the discount on any future realised gains distributed to him (or another individual) down the track. Which you know, but you referred to a company in your comment.

jpl, you're best off just discussing all the ins and outs with your accountant.


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## jpldavis (5 March 2009)

Thanks guys. This has been very helpful. Much appreciated.


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## zcream (28 October 2011)

Thanks for an excellent thread.

>>
a discretionary trust with a company as trustee and a beneficiary of the trust
>>

With such a structure, can one of the beneficiaries be a foreign citizen ? I am an Ozzie citizen, but have no family here. My brother is a foreign citizen and lives overseas.


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