Ownership Structures of Investments Part A

Order Kerney Whalbury and a waddery woman. And before we get started on She's on the Money podcast, I would like to acknowledge the traditional custodians of the land of which this podcast is recorded on a wondery country, acknowledging the elders, the ancestors and the next generation coming through as this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow.

in the right structure to begin with. This really comes in if you have big investment amounts like inheritances or you're talking about estate planning and stuff like that along the long term and you just want to make the right decision so that it benefits family members and the future and potentially your tax rates. So it's good to know beforehand. It's also good to know once you are an investor, because you can always change your structure. And yeah,

it's just a very exciting topic to talk about. I know you don't care at all, but my energy is enough for both of us one hundred percent.

have the fuss of changing things. And as we all know, if you own an investment today, and let's say it does well, because that's the point of owning an investment, right like you want it to do well over the long term. If you get like ten fifteen years down the track and then go, oh damn, I'm back, can I wish I had a different investment structure. To change things into a different structure is not as easy as picking them up and just dropping them into another investment

vehicle or into a trust. You often have to sell down all of those assets, which is going to trigger what we call a CGT event, which is where capital gains tax has to be paid. And that's not that sexy, especially if you're like, well, actually, I was just trying to protect my assets. So something that I have run into historically when I was a financial advisor is I would meet people who had significant wealth and a different

structure would work better for them. So they came to me and said, hey, VE like, you know, my other really rich friend at our really fancy dinner that we went to was talking about a trust structure, and I would really like one of those, because they told me all of these sexy tax benefits and I just can't

believe I haven't thought of it yet. And I'd be like, ah, great, step this way, let's have a chat, and then I do all of the maths and work out what capital gains tax might cost them and what it looks like to change those structures, and it's just not financially feasible for them because they've owned it for so long in their own name and in a particular way that changing it actually doesn't put them in a better or significantly better off position. However, it would have been a better

position had they done it from the start. So it's one of those things where it's better to just learn before we actually get to the point where we're making these decisions. And to be Really Morbid Morbid is my favorite podcast, by the way, but to be Really Morbid for a hot second, Over the next fifteen to twenty years, we are going to see the biggest intergenerational wealth transfer

from boomers down to millennials. And I don't think it's very nice to think about because at the end of the day, we're talking about inheritances, and you know what has to happen for inheritances to be triggered, which is really sad. Yes, However, it means that honestly, a lot of our community are going to have to be making big decisions about lump sums of money whether that is ten thousand dollars, whether it is one hundred thousand dollars

or a couple of million dollars. This conversation is something where if you've already had it today, you're like, all right, well shit, something bad has happened. I'm going to have to go through this process. Didn't V say something that Beck didn't care about? And actually now it's really important. Yeah, So I think it's important to have the conversation. And it's kind of interesting because I'll try and drop in as many tip bits about my ex wealthy clients to

make it like a little bit spicy. Does that make it better?

of investments. So we're going to talk about individual ownership, partnerships, We're going to talk about companies, trusts, what custodial ownership looks like, how you own things through superannuation, and what that difference is when you own something through superversus when you own it individually. And what a hymn is, because I've had a lot of questions about what a hinn is, but we'll get they're.

Should you receive the capital, so should you be able to access the cash both now and in the future. Is there a need for investment assets to be protected from either future creditors or our partners. So I was privileged enough to work in the ultra high net wealth space, so I often worked with people who were inheriting significant sums of money. And we're quite young. So you might come in Beck and be like Hey, this is literally the worst thing in the entire world. Someone very close

to me has passed away yesterday. I'm inheriting you know, a million dollars, And the conversations I need to have with you aren't just oh great, beck have you thought about a trust? It's more, Beck, do you have a partner? What does your partner do? How is your partner contributing financially? What does this money mean to you? Is this money really really special to you? Usually it is because I think a lot of people go, oh my gosh, they're

so lucky they got an inheritance. I guarantee you if you sat down with any person that got an inheritance, they would prefer to give that money back and have the person back in their lives. It's not luck. It's an unfortunate outcome. Like, yes, it is a responsibility. It is the best next thing. So like, if I can't be there for my husband, Becky, I want to make sure that he's final actually okay, And that's me looking after him when I can't be around anymore. And that's

how we should see these things. It's not lucky for you to get an inheritance. In fact, that weight is very, very heavy, and there's often a lot of therapy that goes along with the amount of money that somebody inherits, because you know, let's just say you inherit a couple of thousand dollars. You might go, yeah, okay, no worries. But what happens if your estranged father passes away? You

have no idea. Someone comes and taps you on the shoulder, Maybe a solicitor says, hey, beck, I don't know if you know this, but this really unfortunate event happened a month ago. You're just learning about this, but you didn't realize he was super wealthy. There's so much guilt associated with that because you're like, but I didn't have anything to do with him. I don't know what this money means. I feel very guilty for having it. I don't know how to give this money the respect it deserves. And

I think that that's a bigger conversation. So I'm going off topic and maybe we'll do a whole episode on what it means to inherit money, because I think there's this common misconception that it's luck. Oh, you're so lucky to have had that. Now be able to buy our first home, like, that's not something everybody else gets. Sit down. Nobody wants their inheritance and yes they might be ahead financially, but I promise it's so much better to have that

person in your life. Yes, So we need to talk about I guess am I protecting you against a partner. So you know, if you break up with your partner in five or six years, yeah, you might have built a life together. But do they deserve half of your inheritance? Should they walk away with what your you know, family member worked so hard to have and wanted you to have. So we need to make sure that we're either protected against that or future creditors. We need to check if

there are any special family considerations. So say you get an inheritance, Beck, but you also have a daughter and in a will it was written Beck, you get the money, but XYZ needs to be used for your daughter's educational whatever that means. How do we allocate for that because if it was in a trust and tied up, there might be issues pulling it out to pay for that education, and we need to make sure that that exists. We need to understand what levels of flexibility is needed as

far as debt and leverage is concerned. If that's involved, what are the tax implications of each structure? How does that work? Because tax rates are going to look different if they're your marginal tax rate versus the tax rate inside a trust. But what does that mean when you pull it out? And what other estate planning issues need

to be addressed? That heavy is a lot, it's a lot to think about, but I also think it can be distilled down quite clearly, and we should probably get into that because I feel like I'm overwhelming everybody at this point in time.

I've written a list of things can be Are you ready? Easy to set up and manage, as income and capital gains are included in your individual tax return. Simple. They're easier to administer as there is much less paperwork in comparison to any other structure. They are more cost effective as there's no additional expenses to set them up and run them. They're more tax effective, especially if the investment that you own is negatively gared or one of the

individuals that owns it is a low income earner. So there are cons. So obviously I've done like a pros and cons list because that's very victoriata mine of me. Of course. The cons, Yeah, you're ready, I'm ready. So the assets held by an individual, they offer no flexibility with the distribution of the income. So if you own that asset, the money has to come to you. You can't just send it to somebody else for tax purposes or even distribution purposes. You personally have to pay tax on it.

we've created. I wanted to separate it out and go all right, well, if something happens with the business, I would want the business to be liable, Like, you can take the business's income, you can take all of those things if you came for me personally. Pretty sure.

one is saying. Oh okay, So like, if you're gonna make money on your investment, you're gonna have to pay tax, and it's gonna have to be at your marginal tax rate. Like you can't get out of it, okay. And I'm not saying that you can get out of it with other things, but you know, obviously, the whole purpose of having a negatively gid asset is for one day. It's you start producing income. Sure you'll have to pay tax on that income. And some people don't think about it into the future. Enough.

cost a partnership. It does not pay tax, but it has to distribute all of the income it makes to the partners according to the partnership agreement, so offers limited distribution flexibility. So what that means is it's a separate entity. It does its tax, but come tax time, let's say it made one hundred dollars and you're declaring one hundred dollars. That one hundred dollars cannot stay in that partnership for the next financial year. It has to be taken out.

And if Beck, you and I established a partnership together and it was a fifty to fifty split, it means that legally fifty dollars has to go to you and fifty dollars has to go to me because the partnership can't hold it. I see, it's not a place you can store money.

tax bracket. But you and I were married, we're in love. That money actually goes into our pooled account. Let's just say I stay at home and I look after all of our pets that we have together. You know, I don't have any other income. That can mean that there are some tax benefits because we've distributed the income that is from that partnership, but one hundred percent of the income had to be distributed. So we might have chosen to distribute it all to me this year, but you're still the owner.

audits on them. We'll get to that. But you might just want to be able to, you know, send some more money to me while I'm staying at home and looking after all the pets. Sure, and then you know, when we're both back in the workforce full time, we just split at fifty to fifty.

depending on the size of your company. So if you're on a high taxable income, so let's say you have the highest marginal tax rate in Australia because you big dog, you baller, so you're paying forty eight point five percent personal tax. A company rate might actually be more effective because you get twenty eight and a half or thirty percent tax instead of the forty eight point five. There is also protection for the shareholders if the business fails

or is sued for some reason. There are obviously cons so the disadvantage of this, particularly when it comes to investments. We're not talking about owning a company structure when it comes to business here. But losses can only be offset against future income with the company, and a company is not able to obtain the benefit of any capital gains discount on the sale of investments.

but they made a loss. If you're doing your personal tax return this year, that loss can be declared an offset against your fifty thousand dollars worth of income this year and lower your tax. So that's kind of sexy. It's kind of one of the benefits. However, you cannot do that in a company. It means that you can

only do what's called carrying forward a loss. So we put the loss down on paper and say, oh, well, Victoria's assets lost, you know, let's say ten thousand dollars last year, so I can next use that ten thousand dollars. It's kind of like an IOU sure, I can use that loss to offset tax in the next year, but I can't use it in the same year that it happened, which over the long term, shouldn't matter too much. But at the end of the day, like a lot of people just want to offset it pay as less taxes

possible every single year. Right, the cost to set up a company is arguably very high, I need to say, can be really high, but I've never seen it be cheap. And there is a legal requirement for a separate set of accounts and a tax return each year, as well as ongoing ASSEIC registration fees. So a lot of people think that a trust is set and forget it's not. You don't just set it up and then wham bam, thank you, ma'am. I have a trust. We've spoken about

this before. I pay accounting fees on that trust every single year, and I'm telling you right now they are not the two hundred dollars that you pay for your individual tax return at the accountant. Oh okay, like I'm paying I think around fifteen hundred to two thousand dollars a year for that trust to do all of the accounting on it, which for me makes sense. And I've done all the maths, and as you guys know, I happen to know what I'm talking about when it comes

to this type of stuff. You look al and go. That's so expensive. But also for me, it's like an insurance policy as well. It's a layer of protection that you're paying for. It's a layer of you know, making sure that all of my assets are sitting over in a trust. You can change the names on people in companies and trusts in the future, so like I could be like, oh, Beck, I'm now adopting you as my child. I'm going to add you to my trust so in the future I can distribute income to you. So that's

kind of sexy. Obviously we're still talking about companies. I just get really excited. But also, a company can distribute profit by paying a dividend, but that has to be in accordance with the shareholder registry. So a dividend is when I pay out a certain amount, but I don't have to go and pay double tax on it. But there are rules and regulations about that.

a lot of it. They'll talk to you about the pros and cons, what it actually means for you, and then you'll say, no worries. I cannot tell you how many pages there is to sign when you set up a trust. It's insane, by really, it's honestly insane. Like I remember when I used to do it. So I did it for me. Great, no worries, man them, Thank you, ma'am. Sign here six hundred billion times, like get a cup of coffee, do it over coffee. But I used to

have to set them up for clients. Oh, and it was a bane of my existence, printing all of the documentation because it has to be printed because it has to be in hard copy, right, And then I'd go through with all of my sign here stickers, and I'd use nearly a whole damn box of them, and then I'd be like, hey, if you could just come in, Like I know, we've been doing this financial advice process back and it's been so easy. This is gonna be the worst meeting that we do. I'm so sorry. Come in.

We have to sign your trust documents and you go, what are you talking about? That can't be that bad? And then I like give you this slab it's like half a rim of paper, and I turn it around and be like, do you want to coffee your tea? Like I've put the stickers everywhere. You need to sign here, your partner needs to sign here, I need to sign here.

And witness this like takes ages. Oh my god, Like the amount of times I would sit down with clients and they would be like you weren't joking, were you? And I'm like, I'm sorry, I'm so sorry. But at the end of the day, like it's important to set it up sure, and that makes sure that everything is well and good.

sign it for me? And I'd be like no, like I literally cannot forge your signature. I know that you trust me, but I'm never going to do that. Like, oh, well, could you just like coffee and paste it? No, I can't. I'm so sorry. Like this is the one thing, the one thing I have to get you to do pen and paper. It was like bribery and corruption sometimes yeah, because people will be like, I don't want to do it, and I'd be like, I get that, but I'm also just trying to help you.

about it. Like I had clients name trusts like some of the dumbest things in the entire world. One of my clients was like money for the Crypto and like, obviously that was a joke because they were very conservative. But you know, you can pick any name in the entire world, and clients used to have fun with it. That's the only fun part about setting a trust up. But let's say we've got the Victoria Divine Trust. Sure, I don't own that trust, but I'm nominated as a

beneficiary on that trust. Right now, I'm not needed as one hundred percent beneficiary, which means any profit that that trust makes can be distributed to me right now, any profit, any money that that trust makes, or like you know, I've got this trust, and then I go and invest money. The trust owns it, so I've used the trust as

the person buying the investments. So when I go to fill out a new form back to buy an investment, say I'm going to go buy a new share in A and Z. I don't buy that personally, my trust purchases that. But then if that makes any money, I can distribute it from my trust to me. However, I could also leave the money just sitting in that trust, but it could be me as the beneficiary, or the trust actually could be owned by a company, so you

might have a company as well. So let's say I set up a investment trust, but actually the beneficiary is cheese on the money. It's not me. It could be a company, and then I could be the owner of the company. So you can set it up and be I won't say sneaky, because it's not seeky. It's all above board. It's all legal. But there's just lots of different structures usually in existence for asset protection to make

sure that you're okay. But the more money you're dealing with, the more risk you're carrying, and the more important it is to make sure that you have the right structure, because at the end of the day, like a house of cards, the bigger the house of cards, the more it's going to crumble if one of the bottom cards

gets knocked out. So the trustee, as allowed by what's called the trust deed, which is a very big document that you have to sign when you set up a trust, determines to which beneficiaries and in what proportion the income or assets of the trust are distributed. So I would have my trust right, so all set up, when bam, thank you man, we know who owns it. Then we've got the trust deed. And the trust deed is essentially a set of instructions as to how that income and

how that trust money gets distributed. So if the trust has made a net profit, actually a good question right here? Do you know the difference between net profit and gross profit?

the profit that you took home. And you take that tag and you go, hey, here's my receipt from A and Z tax man. It says that ain Z already paid tax to thirty percent, and it means that you only get taxed the difference between that thirty percent and your marginal tax rate, instead of being taxed an additional thirty percent. So this happens in zupranuation. So this is not something that you usually get to like take heaps

of advantage of. They're most powerful inside supranuation. And I say this because inside supranuation this usually means that you get a bit of a refund because the super environment taxes your money back at fifteen percent. Okay, a franking credit is thirty percent usually, right, what's the difference there? An additional fifteen percent?

that on their tax to get a tax refund. It's not how it works. It's owned by the trust. Sure losses inside trusts can be carried forward though, to offset

against future income. So that's kind of helpful. Like the company, you might have lost money this year, beck, but actually next year, if you make money, don't worry, because we've got that little credit up our slaves to say, last year we lost ten percent, so this year if we make twelve percent, we're going to like add that ten percent and then you just look after the two percent, So it kind of becomes sexy in that way. But again,

that's why long term investment is so important. You can't just look at things over one year, and you shouldn't be too disappointed if in one year, Beck your portfolio makes less money. It's not the end of the world. Because investments, and I've said this a million times on the podcast, like, if you're going to invest in shares, please don't look at it over one or two or

even three or even five years. A minimum of seven to ten years is what you need to be looking at to see if you're making a profit, if it's a good share portfolio. In saying that, I've also said before obviously, if you're making negative ten percent in a bull market where the market is just aggressively going up, all your mates they're making like thirteen fourteen percent on

their share portfolios. Beck. If in that circumstance you're making negative ten percent, we really need to talk about it, God, because there's probably something going on with what your portfolio is returning, and your portfolio, as much as it shouldn't be identical because you've probably selected a different array of asset classes. Your portfolio should be relatively reflective of the market.

So like when we went through COVID, everyone was absolutely terrified because their portfolios were off, but my friend and the entire economy was off, so it made sense that your share portfolio was reflective of that. Yeah, and that's okay. You can't beat the market. I wish you could. Can't be by market at the end of the day. I think that's a good you know, a little bit of a sense check. Like if you're worried about your own portfolio.

I was recording my audio book the other day back and like I said it, and I just couldn't stop laughing at myself. I was like, when in doubt, zoom out, but like it's true, Like when in doubt, look at the bigger picture. Yes, Like don't just look at your portfolio because that could make you feel terrible. Zoom out and be like, oh wow, Like actually everybody's portfolios are performing like this at the moment. It must be something in the economy, it must be something bigger than me.

But yes, we need to be looking long term. It's really solid advice fee Okay. I'm not done though, Okay, because we just talked about how sexy trusts are. Yes, but there are three types of different trusts. Oh good, strap in, sit down, babies, are you ready? So the first is a discretionary trust. Sure, So the trust of a discretionary trust are able to distribute income and capital gains to beneficiaries in whatever way they wish, okay, typically

the most tax effective way. The assets of the trust are also protected in the event of litigation, so legal action against beneficiaries because there is no single individual that owns any asset oh changed by the trust, baby, which is why I was saying before, I'm well not Oh my god, creditors of an individual can't access any assets held by a trust. Creditors also your ex boyfriend oh my god, girlfriend, yeah, or ex human that you used to have a relationship with that is now salty that

wants your staff. Well, it's a trust, babe, and it was pre existing before our relationship. Important to note that it was pre existing before your relationship because if an asset was established while you were in a relationship, it's up for debate. So if you're single right now and you've been thinking about a trust.

hold units in a trust. They have limited application for most personal investments. So would you like me to tell you where I use a unit trust in my life? Yes?

is really nice. Have to wait eighteen years for that. Sure, do you know why you don't distribute income or most people in their right minds do not distribute income to children under the age of eighteen.

able to do that. But at the end of the day, that was institutionalized because really rich people were being like, oh great, I can distribute up to like forty eight thousand dollars to my kid on the lowest marginal tax rate, and then they were getting money out of their trusts at the lowest marginal tax rate and only paying really really low amounts instead of the forty eight and a half percent that they should have been paying because they

were using their kids, they were dropping in invex account and then transferring it back to the parents.

That's why often parents, if they're investing for their children, will make the decision to purchase shares and just have them in their name and transfer them to their kids' names when they turn eighteen.

better at me, you know what, You're great too. But at the end of the day, like I like Kate so much that I went into business with her K's But Kate and I have a U unit trust, and we have a unit trust because we wanted to make sure that when we were in our right minds and so in love and so excited to start this business venture, we were like, we definitely get fifty to fifty each.

These are the entitlements. This is what's happening. Whereas if we had a discretionary trust, that could have been flexible, like no, no, no, no, this isn't flexible. I own half the units, Kate owns half the units. What we get in terms of income or capital or both is pre determined and set. And that's why we have a unit trust instead of a discretionary trust, because we're in business.

Like business sometimes doesn't go so well, but I want to make sure that we're both protected and we both have assets that are definitely allocated so that it's not about, oh, Beck, can I have more this month than you had? No? No, no, Like it's set, it's pre determined. So obviously that's why they have limited application for most personal investments because you don't get that flexibility. You would have to sell some

units in that trust for somebody to come in. But my units in my trust are actually owned by my discretionary trust.

be hybrid discretionary or hybrid unit trusts. So discretionary are obviously the most common, but they take the best features of both discretionary and unit trusts and mix them together in the one entity to create a powerful and flexible tax planning solution not as common. Requires a lot more documentation because you don't just go to your accountant and have them organize a standard unit trust trusteed, so it's

much more expensive. You might go, oh, V, I really like the idea of discretionary trust and the flexibility, but I also really like the set nature of unit trusts and how units are issued. And these are conversations to have with your accountant. And to be honest, most people in cheese on the money aren't going to care one way or another about this. But you might care about a discretionary trust if you're not in business.

is very exciting. We're going to talk about chess sponsorship, which is a question that I get a lot all the time about when you're purchasing a share does it need to have chess sponsorship or not? And spoiler, it's not as important as you think it is. And we're going to just talk about I guess the ownership structures inside shares so you can be a little bit more

comfortable with that. So this was more how do you individually own the share and then how do you purchase the share on the share market and own that?

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