What structure should I invest in?

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Good news! You are looking into your future and realising that putting your money in your savings account is not enough to fund your retirement. You are looking to start investing. You speak to your mates who’s told you to put your money in shares or properties. Perhaps you have started talking to your financial planner or investment manager about what to do with your savings. Soon enough you have decided on what to invest in and ready to put your money in.

HOLD ON. Is investing in your personal name the best thing to do here? What other options do I have? What are the pros and cons?

 

1. Investing in your own name

This is the most common structure most people invest in when they first start out. This is a simple and cost-effective structure, virtually spending nothing to get things started. Most shares trading platforms are free to set up.

However, the ongoing consequences for this may not work in your favour.

Let’s imagine this scenario: You are a PAYG employee, receiving $150k income per year. Your spouse is also a PAYG employee, but he/she is earning $50k a year. You decide to buy some shares under your personal name and each year, it is paying a dividend of $100 per year. At the end of the financial year, the $100 gets taxed at your marginal tax rate, you pay $37 on that $100 dividend. However, if this was purchased under your spouse’s name, it will be at a much lower rate, paying $32.50 on that $100 dividend. You realised that you could be paying less tax but now it is too late to change the ownership without triggering capital gains tax. If this was an investment property, the capital gains may be even more staggering.

This is a common scenario we often encounter with our clients, which is why we often advise our clients to have a chat with us before purchasing any assets for investment purposes.

 

2. Investing in a trust

A common investment vehicle is a discretionary trust. The biggest benefit of investing in a trust is its flexibility to direct the income to family members and related parties.

Using the scenario above, you will be able to, in the financial year, direct the dividend income to your spouse in order to pay less tax as a family group. If you, for whatever reason, receive less PAYG income for the financial year and your spouse has a higher income, you can then in that specific financial year, direct the dividend income to yourself.

There are costs to set up the trust but often, it outweighs the benefit in the long run.

The other disadvantage to investing in a trust is that, if there is a tax loss in investment in the financial year, you may not be able to extract that benefit in the financial year. This is because we cannot distribute losses to its beneficiaries, and it needs to be accumulated in the trust until a profit is available.

This is common for those purchasing a property, and in the first few years, the property is negatively geared (more expenses than income). If you own the property under your name, then the losses can be offset against your PAYG income, paying lower tax in the financial year. If you own the property under a trust, this loss sits in the trust until a profit is made. Having said that, this may not be such a disadvantage for those looking to invest long term.

 

What you need to consider

The question of what structure to invest in is not a straightforward one. It depends on a few questions like

  • What do you want to invest in?
  • What is the risk of the investment?
  • Is this a short term or long term investment?
  • What is your family structure like? (and perhaps the relationship you have with your family)
  • Do you run your own business or do you work for someone?

The list goes on…

So before you jump into the investor bandwagon, talk to your accountant to see what structure best suits your needs.