Vehicle to buy Shares?

Dawson45 · 11 February 2013

Hi,

I have a question regarding which vehicle to buy shares in. My situation is that I run a fairly succesful business, so i now have some excess funds to invest in the share market. Currently the majority of my cash is sitting inside a company structure (business operates out of a trust and distributes profits to the company).

My accountant is telling me to buy shares inside the company, but im not sure this is correct as I then wont get the 50% CGT discount on future Capital Gains.

So my question is, should i buy in the company or would i be better off paying out fully franked dividends and buying shares either in my name, or a trust. A dividend would see me pay some tax at my marginal rate (thus less money to buy shares), but then long term am I not better off by having access to the CGT discount.

Help appreciated by anyone who has been in this predicament or has any thoughts on this issue.

Thanks

Dawson

prawn_86 · 11 February 2013

Re: Vehicle to buy Shares

Hi Dawson,

Welcome to ASF

Please note it is illegal for ASF meembers to give financial advice unless they operate under an AFSL. Generally we would advise yous peak to a licensed advisor, but it sounds like you have done that so one would assume that he has knowledge in these matters.

Members here may be able to give a general breakdown of where CGT etc is applicable but cannot tell you what to do

Thanks

skc · 11 February 2013

Re: Vehicle to buy Shares

Have your company loan you (or your family trust) the money at market interest rate.

The interest income to your company is taxed at 30% company rate. The interest expense to you is tax deductible at your marginal tax rate. So net off should be pretty even.

Of course check with your accountant, lawyer, neighbour, hair dresser and dog as the above is purely my own musing and may or may not be doable or legal.

Klogg · 11 February 2013

Re: Vehicle to buy Shares

Dawson45 said:
Hi,

I have a question regarding which vehicle to buy shares in. My situation is that I run a fairly succesful business, so i now have some excess funds to invest in the share market. Currently the majority of my cash is sitting inside a company structure (business operates out of a trust and distributes profits to the company).

My accountant is telling me to buy shares inside the company, but im not sure this is correct as I then wont get the 50% CGT discount on future Capital Gains.

So my question is, should i buy in the company or would i be better off paying out fully franked dividends and buying shares either in my name, or a trust. A dividend would see me pay some tax at my marginal rate (thus less money to buy shares), but then long term am I not better off by having access to the CGT discount.

Help appreciated by anyone who has been in this predicament or has any thoughts on this issue.

Thanks

Dawson

Before you read - this is not advice, just a suggestion that you can take up with someone who's licensed to make recommendations...

There's a number of ways you can do it, but in all honesty I would be investing in my personal name unless:
- tax rate was above 30% for a long time
- I was investing a substantial amount (~100K plus, but that's debatable) and planning on increasing this.
- I understood the implications of holding the securities in a trust or company (or were willing to learn this)

If you can meet those, then a trust would be my choice (again, not advice, just what I would do).

I personally have a Trust, with a Corporate Trustee (i.e. a company as the trustee) and myself as the sole director. There are five beneficiaries (myself, my brother and parents and a holding company) and can distribute the profits in the most tax efficient way, as opposed to paying 38%/45% tax.

Holding these in a trust also allows me to receive the 50% CGT discount.

Keep in mind though, maintaining a trust is at a minimum about $500 in ASIC fees (from memory), not including accounting fees of approx $1-2k.
If you think your profits are going to be wiped out by this, then don't bother... Better off paying extra tax then having no profits to pay tax on!

Dawson45 · 11 February 2013

Re: Vehicle to buy Shares

Klogg said:
Before you read - this is not advice, just a suggestion that you can take up with someone who's licensed to make recommendations...

There's a number of ways you can do it, but in all honesty I would be investing in my personal name unless:
- tax rate was above 30% for a long time
- I was investing a substantial amount (~100K plus, but that's debatable) and planning on increasing this.
- I understood the implications of holding the securities in a trust or company (or were willing to learn this)

If you can meet those, then a trust would be my choice (again, not advice, just what I would do).

I personally have a Trust, with a Corporate Trustee (i.e. a company as the trustee) and myself as the sole director. There are five beneficiaries (myself, my brother and parents and a holding company) and can distribute the profits in the most tax efficient way, as opposed to paying 38%/45% tax.

Holding these in a trust also allows me to receive the 50% CGT discount.

Keep in mind though, maintaining a trust is at a minimum about $500 in ASIC fees (from memory), not including accounting fees of approx $1-2k.
If you think your profits are going to be wiped out by this, then don't bother... Better off paying extra tax then having no profits to pay tax on!

Thanks for that

Yeah, the dollars we are talking are quite substantial, so would be worthwhile setting up a Trust as you described. I guess my key issue is whether its worth copping the additional tax hit upfront to get the money out of the company.

i.e - say i had $500K in the company to invest. I can either invest the full $500K their, or i pay myself out a dividend, pay tax but then i can invest in a trust structure, but only have $410K to invest, as ive lost $90K in tax (46.5% less 30% Franked Dividend Credit). Do people think long term the advantage of having access to the CGT discount outweights the disadvantage of having $90K less to invest with upfront?

P.S - I am a CPA, so you can hit me with all sorts of accounting lingo. Dont work in tax day to day, but have a good understanding of all the structures available.

skc · 11 February 2013

Re: Vehicle to buy Shares

Dawson45 said:
Thanks for that

Yeah, the dollars we are talking are quite substantial, so would be worthwhile setting up a Trust as you described. I guess my key issue is whether its worth copping the additional tax hit upfront to get the money out of the company.

i.e - say i had $500K in the company to invest. I can either invest the full $500K their, or i pay myself out a dividend, pay tax but then i can invest in a trust structure, but only have $410K to invest, as ive lost $90K in tax (46.5% less 30% Franked Dividend Credit). Do people think long term the advantage of having access to the CGT discount outweights the disadvantage of having $90K less to invest with upfront?

P.S - I am a CPA, so you can hit me with all sorts of accounting lingo. Dont work in tax day to day, but have a good understanding of all the structures available.

You will need to make some assumptions of your likely return over your investment horizon. But if you don't have a meaningful way of making some sensible assumptions then it's really not an answerable question.

Here's a first pass... you double your money in 5 years.

Case A - under company structure. Capital = $500k. Profit = $500k. Tax on profit = $150k. Net = $850k (although remember this is still in the company).

Case B - under personal name. Capital = $410k. Profit = $410k. Discounted tax @ 45% = $92k. Net = $728k.

You can probably calculate the breakeven timeframe under various return assumptions and make a semi educated guess there.

pedalofogus · 11 February 2013

Re: Vehicle to buy Shares

Hi Dawson,

I am going to abide by the rules and not give you any advice. But what I will do is make a few general comments (which happen to apply to your case) from my perspective as a Chartered Accountant and Tax Agent:

1. As you have already noted, depending on your tax rate there will be "top-up" tax payable if you pay out the excess funds from your Trading Company to yourself as dividends. So you will be paying tax now to save some tax later.

2. If you invest in the share market through your company, you will also avoid paying any "top-up" tax on the dividends you receive while investing in the share market.

3. Tax rate in company is 30% with no CGT General Discount. Tax rate for you personally is possibly 46.5%. If you get a 50% general discount it brings it down to 23.25%. So in reality, if you own the shares in your own name it is possible that you aren't actually getting a 50% discount, you are only saving the difference between 30% tax rate and 23.25% tax rate, not to mention the impact that those taxable capital gains could have on things in your personal return such as Private Health Insurance Rebate, Whole-of-income ETP cap, etc.

So the tax savings you will make on the Capital Gains Tax might be outweighed by the "top-up" tax on the dividends and, as the previous poster noted, the extra costs involved in possibly maintaining additional family trusts etc on an annual basis.

Anyway, as i noted at the start of this post, this isn't advice. Without knowing your personal circumstances there is no way anyone can advise you on this. But what i have tried to do here is set out some of the steps i work through when considering this exact issue for clients.

Hope this helps.

McLovin · 11 February 2013

Re: Vehicle to buy Shares

Dawson45 said:
Thanks for that

Yeah, the dollars we are talking are quite substantial, so would be worthwhile setting up a Trust as you described. I guess my key issue is whether its worth copping the additional tax hit upfront to get the money out of the company.

i.e - say i had $500K in the company to invest. I can either invest the full $500K their, or i pay myself out a dividend, pay tax but then i can invest in a trust structure, but only have $410K to invest, as ive lost $90K in tax (46.5% less 30% Franked Dividend Credit). Do people think long term the advantage of having access to the CGT discount outweights the disadvantage of having $90K less to invest with upfront?

P.S - I am a CPA, so you can hit me with all sorts of accounting lingo. Dont work in tax day to day, but have a good understanding of all the structures available.

How many people are shareholders of the company? You could make several distributions. If you haven't done your 2012 tax return, you can have a declared but unpaid dividend (I think!) put in for 2012. Do the same for this year, and the next and with two shareholders you could theoretically get all the money out tax free by July 1 this year, you might even get some of the franking credits back! You could also look at paying directors of the company a fee (salary) from the corp bene.

I'm not an accountant though so as skc suggest, check with your hairdresser etc.

Dawson45 · 11 February 2013

Re: Vehicle to buy Shares

pedalofogus said:
Hi Dawson,

I am going to abide by the rules and not give you any advice. But what I will do is make a few general comments (which happen to apply to your case) from my perspective as a Chartered Accountant and Tax Agent:

1. As you have already noted, depending on your tax rate there will be "top-up" tax payable if you pay out the excess funds from your Trading Company to yourself as dividends. So you will be paying tax now to save some tax later.

2. If you invest in the share market through your company, you will also avoid paying any "top-up" tax on the dividends you receive while investing in the share market.

3. Tax rate in company is 30% with no CGT General Discount. Tax rate for you personally is possibly 46.5%. If you get a 50% general discount it brings it down to 23.25%. So in reality, if you own the shares in your own name it is possible that you aren't actually getting a 50% discount, you are only saving the difference between 30% tax rate and 23.25% tax rate, not to mention the impact that those taxable capital gains could have on things in your personal return such as Private Health Insurance Rebate, Whole-of-income ETP cap, etc.

So the tax savings you will make on the Capital Gains Tax might be outweighed by the "top-up" tax on the dividends and, as the previous poster noted, the extra costs involved in possibly maintaining additional family trusts etc on an annual basis.

Anyway, as i noted at the start of this post, this isn't advice. Without knowing your personal circumstances there is no way anyone can advise you on this. But what i have tried to do here is set out some of the steps i work through when considering this exact issue for clients.

Hope this helps.

Yep, that all makes sense. I guess it also comes down to when i might actually want to use the money in the company for private uses like buying a new house etc as ill have to pay the extra tax anyway. Although is it possible to do that in a pty ltd company? Im guessing though once you start using that cash for private purposes it becomes a loan to the shareholder rather than just a company asset?

Guess what im guessing at is do you ever have to pull money out of a company or can you just use the money in there to do whatever you please (of course not claiming deductions or anything, just using the cash on private capital acqusitions in the company name)

Thanks for all the informative replies thus far

craft · 11 February 2013

Re: Vehicle to buy Shares

Dawson45 said:
Yep, that all makes sense. I guess it also comes down to when i might actually want to use the money in the company for private uses like buying a new house etc as ill have to pay the extra tax anyway. Although is it possible to do that in a pty ltd company? Im guessing though once you start using that cash for private purposes it becomes a loan to the shareholder rather than just a company asset?

Guess what im guessing at is do you ever have to pull money out of a company or can you just use the money in there to do whatever you please (of course not claiming deductions or anything, just using the cash on private capital acqusitions in the company name)

Thanks for all the informative replies thus far

Be very careful with any loans, that they confirm to the requirements of excluded loans under section 7A – this goes for the loan set up that SKC suggested as well.

Personal expenditure from with-in company should be accounted for as drawings and beyound contributed capital be treated as dividends.

Ideal set up seems to be assets in family trust with private company as one of the beneficiaries to shield natural beneficiaries once all their marginal tax rates go above company rate.

For retained earnings that get accumulated in the corporate structure it’s a breakeven decision as to whether you withdraw for CGT discount benefits etc –[with the assumption for the breakeven being largely unknowable] I have come to the conclusion that leaving it in there is the best course until the cash for personal consumption is needed – No matter how you wriggle the integrity measures in the tax code are going to be trying to ensure you pay your marginal rates on money you want out of the company.

I’m not qualified in any way – so this may be wrong information.

waimate01 · 12 February 2013

Answering this question involves arithmetic rather than investment advice.

Grab a spreadsheet and work it through - you're a CPA. Assumptions are the compounding rate of the investment and the number of years you hold it. What you'll find is that it's pretty much a line ball. Don't forget the medicare levy.

Vehicle to buy Shares?

Dawson45

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Dawson45

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