Tax ideas!

[Sir Burr]

Hi,

Getting close to THAT time again

I'm not looking for any detailed tax advice. Just some idea or a good link on this stuff!

I will see my accountant but would like to know how other people organise their tax here in advance so that I can discuss it with at least a little knowledge.

Basically I have my trading account in my wifes name as she earns 1/2 of what I make. We are both PAYE and having good returns this tax year, it will push her into the higher tax bracket.

Currently I re-invest all profits back into my capital and don't see that changing for a long time.

I think (know very little about this) that some options are Trusts, creating a company or superanuation. We already have super through the places we work so I guess a Trust or a Company could be used to save some tax????

Has anyone setup either of these that could say if it's a good idea or if one is better than the other.

SB

 

[tech/a]

Many underestimate or completely ignore the single biggest threat to Trading Profits---TAX!!

I have a Plastic draw box and every single reciept I can justify as a trading expense,goes in there.It never ceases to amaze me what I spend on Data,Books,Software,Mags,Paper,Computers,Inks,Newsletters,Brokers,Stationary---the list goes on.They want my tax well I want my deductions---simple but youd be suprised what you lose and dont/cant claim.

Holding longterm has a 20% tax advantage.
Takes the cream of some 50%+ runners of recient times---hold em and most have retraced more than the tax!!

There is Super ofcourse but I dont even trade in my SMSF with excess funds,(Do trade capital from managed funds now in my own super,purely because I cant get it out!)

WHY?
Cant leverage thats worth more than the tax deductions---well to me anyway.

 

[ctp6360]

I totally agree with you tech/a. I have always seen paying tax as something that is unavoidable, so you might as well accept it and just earn more money. That is my policy with my businesses and with my personal income.

Why fret or put yourself intentially in a negative financial position, or at risk with the law, just to save a few thousand on tax? You're better to work that bit harder, spend that bit of extra time researching a trade and just earn more money. Sure, I may only get 55% of the money I earn (since the budget), but I'd rather that be 55% of a LOT than 52% (or whatever my efforts get me) of less.

 

[GreatPig]

just to save a few thousand on tax

Not very pleasant though when the tax bill is a few tens of thousands, or even a few hundred thousand.

The income side of the equation is very nice of course, but taking the price of a decent house in some areas and just handing it over to the ATO wrenches at the stomach .

GP

 

[ctp6360]

GP I was just trying to make myself feel better, I know what you mean about the house thing! I hope everyone enjoys their roads/welfare!

 

[krisbarry]

Tax is the privilege you pay for taking a risk that pays off.....

Tax is the privilege of having employment

Tax is the privilege of owning your own home

Tax is the privilege of driving your own car


....and so on

 

[tech/a]

Not very pleasant though when the tax bill is a few tens of thousands, or even a few hundred thousand.

The income side of the equation is very nice of course, but taking the price of a decent house in some areas and just handing it over to the ATO wrenches at the stomach .

GP

Yeh.

Those that outperform are rewarded by our governments by having to pay massive taxes.
Not only that but if your late you'll be crucified further for that over performance.

 

[bullmarket]

Hi Sir Burr

I totally agree with you in trying to minimise your tax - legally of course

As probably the best and most successful business man we have ever had, Kerry Packer, once said in response to a question that he believed he shouldn't have to pay 1 extra cent in tax that he didn't have to since the gov't wasn't very good at spending it ........:iagree: 100%

In reply to your question I think that if you go through the process of setting yourself up as a company or trust then you probably will be able to reduce the amount of tax you pay from what you pay now. But since the pros and cons of each will vary and depend on your particular circumstances the best thing to do imo would be to talk to your accountant/financial adviser and get information from him/her. There might even be some general info on the ATO site to give you a bit more background on the pros and cons of trusts and companies.

But the best advice I can give atm is that whatever you decide to do, make sure you do it by the book because for this coming year at least the ATO is cracking down on things like family trusts that are being used for tax avoidance.

Cheers

bullmarket

 

[mit]

Not very pleasant though when the tax bill is a few tens of thousands, or even a few hundred thousand.

GP

Hey I'd love to have to pay hundreds of thousands in Tax. (Thinking of the gross income required to have to pay that much tax)


MIT

 

[YOUNG_TRADER]

Tax is the privilege you pay for taking a risk that pays off.....

Tax is the privilege of having employment

Tax is the privilege of owning your own home

Tax is the privilege of driving your own car


....and so on

lol, probably why so many of my Corporate Law and Banking associates are getting lured to the middle east where they don't have to pay for the 'privileges' you talk about,

And those 'privileges' you talk about I view as rights which I have earned

 

[Rafa]

From what i know...

TRUST: Good as you can distribute it as you see fit, but you have to distribute everything at the end of the financial year, or pay tax at the max rate.

COMPANY: 30% tax rate on everythiing, and am pretty sure, there is no cap gains discount for holding shares for more than 1 year

SUPER: Lowest rate of tax, but wait till 60 to get it... plus limited to what you can invest, no margin lending, etc...

I've moved to trading in Family Trust... distributing to all family members...

 

[mit]

From what i know...


COMPANY: 30% tax rate on everythiing, and am pretty sure, there is no cap gains discount for holding shares for more than 1 year

As I trade fairly short term I was thinking of a company structure as I would only pay 30% on profits. I could build my stake faster than at my current tax rate of 47% (until I paid myself a dividend of course). My accountant said that the ATO frowned on this and look for a more legitimate reason for forming a company other than reducing tax.

From the property forums I have found another good reason to form a trust and that is in case you ever get sued, it is harder to extract your capital.

MIT

 

[GreatPig]

Hey I'd love to have to pay hundreds of thousands in Tax. (Thinking of the gross income required to have to pay that much tax)

Yeah, as I said, the income part is great (although in my case was a one-off affair, not every year unfortunately ).

However, there's a dissociation between the income and the tax, as it can be up to 18 months or so after receiving the income that the tax finally has to be paid (which in itself is good, provided you haven't been stuck on a percentage PAYG rate already).

So you feel all happy and glad when the money comes in, but a year or so later when you have to pay the tax bill, you've kinda gotten over all that and just see this huge amount of money going down the toilet to the ATO that you could buy another house with or whatever.

It's kinda like scolding the dog today for something it did 6 months ago

GP

 

[GreatPig]

As I trade fairly short term I was thinking of a company structure as I would only pay 30% on profits. I could build my stake faster than at my current tax rate of 47% (until I paid myself a dividend of course).

From 1st July 2006, you will need to be earning more than about $120,000 pa gross to be paying more tax than a company. Remember that while the company rate is only 30%, it's a flat rate from the very first dollar. From July, an individual earning less than $120K will pay less tax than a company earning the same amount. And that's without considering the loss of the CGT concession in a company.

Companies can also be a major PITA in that the rules relating to the use of funds in a private company are rather strict. With a family company, you have to be very careful about how you use company funds else the ATO might deem it as a dividend to you, whereby you'd lose the associated franking credits.

And as you note, to get the money safely into your own hands you have to pay a dividend, which would incur extra tax if you (as shareholder) are on a marginal rate above 30%.

Having said all that, if you're running a trading business where there are no capital gains (it's all income) and you have a reasonably large amount of funds, then a company may still be a good option. The ability to retain earnings at 30% where large trust distributions to high-income beneficiaries would involve higher rates of tax might make a company structure worthwhile. And you could make the company owned by a trust for more flexibility (although with added costs for the extra structure if you didn't otherwise need it).

In the end though of course, you should discuss your own situation with a financial professional.

Cheers,
GP

 

[bowser]

Has anyone else considered trading from an offshore based trading account? The commisions are higher but they are certainly less than losing 40-45% in the case of profits. I suppose one drawback is that you cant offset any losses incurred trading.

 

[Rafa]

dunno much about this, or if they are indeed even legal

 

[crackaton]

It is possible to by visas for certain country legally. You become dual citizenship and then do it that way all above board.

 

[chemist]

Has anyone else considered trading from an offshore based trading account? The commisions are higher but they are certainly less than losing 40-45% in the case of profits.

The ATO regards the income and assets of residents of Australia to be taxable by them worldwide, so this is illegal. Not that there's anything wrong with that, of course.

I suppose one drawback is that you cant offset any losses incurred trading.

You want to be pretty sure you're profitable before you do anything this dodgy. Oh, and another drawback is going to jail. See Operation Wickenby (not that they seem to be making much progress towards jailing anyone there).

Cheers,
Chemist

 

[Sir Burr]

tech /a, Many underestimate or completely ignore the single biggest threat to Trading Profits---TAX!!

Yes that's why I'm interested in learning if there are other ways of minimising tax.

I rejoice when my trades are >52 weeks and many are (longer term trading here ). I think by the sounds of it, company tax is a flat rate of 30% so there is no 50% discount! At even the top PAYE rate the tax would be less than 30% with the 50% discount. Doesn't sound too promising (for me).

Bullmarket, I totally agree with you in trying to minimise your tax - legally of course

Not looking for any illegal stuff just interested in any other ways to minimise. I think company tax may not be the ideal in my situation due to no 50% reduction.

I believe that using a trust, tax is only paid when money is withdrawn. This sounds interesting as compounding profits is what I'm aiming for. Anyone know if the 50% rule applies with trusts and what the general tax rate is for them? (Rafa mentiones otherwise: "have to distribute everything at the end of the financial year"?)

There seems to be different ideas about the neg/pos of tax situations. It would be good if there was some "rule of thumb" for company/trusts we could go by!

SB

 

[GreatPig]

I think by the sounds of it, company tax is a flat rate of 30%

Correct.

so there is no 50% discount!

Also correct, although that has nothing to do with the 30% rate. Companies are simply not entitled to the 50% CGT concession.

I believe that using a trust, tax is only paid when money is withdrawn. This sounds interesting as compounding profits is what I'm aiming for. Anyone know if the 50% rule applies with trusts and what the general tax rate is for them? (Rafa mentiones otherwise: "have to distribute everything at the end of the financial year"?)

A trust has to distribute all profits (capital gains and income) at the end of each financial year to avoid being taxed at the top rate. Those profits are then taxed in the hands of the beneficiaries at their own normal rates. Effectively all profits just flow through a trust onto the beneficiaries and keep their form (ie. rent stays as rent, dividends stay as dividends, etc). Franking credits are also passed through (with some possible exceptions due to certain trust loss provisions) and the 50% discount is retained where applicable.

So if you receive a distribution from a trust, it's treated the same as if you had received it directly yourself from the original source. The tax rate is your own personal tax rate.

It would be good if there was some "rule of thumb" for company/trusts we could go by!

My very basic rules of thumb would be:

• Companies for businesses (although trusts are possible as well)
• Trusts for investments
• Personal names only if the amount of funds is too small to justify a trust

Most importantly, don't buy appreciating assets (those that generate capital gains) in a company structure.

Of course this is very broad, and personal circumstances may well dictate otherwise (but then that's why it's called rule of thumb ).

Cheers,
GP