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What structures should I use to minimise my tax when investing? In this episode, Tom Gleeson and Stefan Angelini unpack 6 different structures and explain how they might be useful to different people with different circumstances
Tom Gleeson
Good morning, everyone. Stefan and Tom here from Angel Advisory. Welcome to the Real Wealth Podcast. No doubt everyone watching has had some conversations in the past about saving, investing, and about generating returns. But today we're here to talk about an aspect that's a little more neglected, which is the different options for tax structures,
Stefan Angelini
Tax planning. Because what's the point of making money if you're going to lose it all in tax?
Tom Gleeson
That's it.
Stefan Angelini
Cool. All right. So when it comes to taxes, I guess it's all about the structure you set up in, or what you invest or the name you invest through. And that's what we're going to talk about, what kind of names you can invest through. You get discounts sometimes depending on the structures. So we'll discuss that as well. But really we're talking about the differences between paying, say, 47% tax, which might be the most, or going all the way down to paying no tax. The structure does matter.
Tom Gleeson
Sure.
Stefan Angelini
Because if you make $1,000, would you rather keep $530 of it or would you rather keep $1,000 of it?
Tom Gleeson
So in that regard, everyone knows generally how it works when it's in their personal name. But we're going to look at the other options beyond that and how the tax can be structured.
Stefan Angelini
Should be fun, let's hope.
Tom Gleeson
All right. So do you want to touch on, just as a baseline, to touch on the tax effect of being held in personal names before we move on to the other sort of more complex structures?
Stefan Angelini
Yeah. Cool. So most people do invest with their personal names. They set themselves up in I want to share portfolio or own a property in my name. Tom and then therefore, whenever they get distributed income, it goes on to their assessable income. Now, if you know, in Australia, the top tax bracket you can be on is a 47% tax rate, which you sort of want to try and be clear of if you can. Now, that might not be taxes today, but people's wages grow over time. So even if you invest in that structure at the point today, and let's say you want your wage to go up in 10 years' time and you still own that asset, then the income is going to be taxed. That assessable income only because your personal name can be good, because if you hold an asset for longer than 12 months, you get a 50% capital gains tax discount. So if you think about it, if I own something and I sell it after 15 months and I made $1,000, then only $500 of that goes on to my assessable income. If I'm on the highest marginal tax rate, then you pay about 23% tax on the sale. So the easiest way to put it can be your name, a joint name. But when you invest in that, you're invested in that structure for a long term. So that all comes down to what is your marginal tax rate. Yeah, that anywhere between 0 and 47%.
Tom Gleeson
Yeah,
Stefan Angelini
That's the most simple one.
Tom Gleeson
Yeah. Beyond that, I suppose the next one would be one that we use a lot, and that would be family trust. So ownership through the family trust and how that differs.
Stefan Angelini
So family trust obviously sets an accounting structure. So cost money to set up and it costs money to run each year because it needs to do a tax return. The benefit of a family trust is that you can choose who earns the income in a given tax year. So you can choose whether it be, say, if you got Tom. Tom is in it with his wife. If he gets one one day, we'll see. Leaping ahead.
Tom Gleeson
But yeah, try my fictional wife
Stefan Angelini
Talking about the future.
Tom Gleeson
Yeah. Yeah.
Stefan Angelini
It's. So I'm making the money. If I've got someone who's not working, maybe the in that year, the person who's not earning an income should derive the income from my investments being their marginal tax rate or the assessable income is currently zero. We make $10,000 from our investments that goes on to their assessable income. They don't have a tax rate as opposed to the partner who might be making $150,000 a year. Not saying that's your wage and could be.
Tom Gleeson
I wish I could get married,
Stefan Angelini
I get in there.
Tom Gleeson
I'm now married, I'm getting paid more. Carry on.
Stefan Angelini
That person if you're on 150 grand, you don't want to be earning another $10,000 because a lot of it's going in taxes. So it's called a Family Trust or a Discretionary Trust. You get the discretion to decide who's going to earn the income. It used to be really great where you can choose a whole lot of different people, but it's really changed a lot where you can't choose as many people you can give the money to, but still it comes down to the individual tax level. You still get the same capital gains tax exemptions as always in your personal name, because when it's invested there and it derives an income or a benefit, it needs to go down through to a person or a beneficiary, being an individual person. So the same tax benefits apply in your personal name, but all you get is that benefit of being able to choose who the money can go to.
Tom Gleeson
Yes. And with regard to what you mentioned before about the beneficiaries that they've tightened up, who that can be. So it can no longer be your situation if it's your second cousin's, neighbor's, best friend.
Stefan Angelini
Yeah.
Tom Gleeson
It's pretty within the family unit.
Stefan Angelini
It's there a lot tougher.
Tom Gleeson
Yeah.
Stefan Angelini
It's a lot tougher. But yeah. So if you think about it, while it doesn't make sense to a lot of people straight away, if you look at where people's incomes are going in the future and this is why financial planning makes sense. In 10 years time, if we all both want to be earning really good money, or I know that I'm going to be earning a lot of money, we might want to invest it through a family trust because it's going to create better tax, more tax benefits in the longer term, as opposed up just right now and in the short term. So that's why a lot of people, we set up a few of them because it's that long term objective.
Tom Gleeson
So that's family trust/discretionary trust. The next one we want to chat about is company.
Stefan Angelini
Yeah. Yeah.
Tom Gleeson
Which I think a lot of people, not many people would be familiar with.
Stefan Angelini
Yeah, so company, a lot of people set up companies or have like an ABN and you earn an income from your company if you're a sole trader ABN. But once you're running under a company for a small business, your, your tax rate is 25%. But some people want to invest through a company now. Investing passive income through a company, it's okay, but you get a tax rate of 30%. 30% is not great, but it's better than if you're on a high marginal tax rate in your personal name.
Tom Gleeson
Yeah.
Stefan Angelini
When you're investing in long term assets. So like shares property and things like that. In your personal names, you get a capital gains tax discount. So half of it 50% CGT discount, you hold the asset for longer than 12 months. When it's in a company, you don't get that. So it's taxed at 30% no matter what. So you can have more tax implications if you're holding long term assets. But income producing assets, it can be good because your taxes capped 30% in there. It's got to come out eventually to a person. But it's you'd loss of a discount that you get by investing through a company.
Tom Gleeson
Yeah.
Stefan Angelini
But still, 30% tax rate can be pretty good.
Tom Gleeson
Yeah. Okay, so the next one I'm actually not familiar with, but we want to chat about how it works through an investment bond.
Stefan Angelini
Yeah, investment bonds are cool. So investment bonds are really great for high income earners, people that want to invest for future generations. Essentially, we call it a non-estate asset so it doesn't go into your tax return. You got a completely different tax phone number normally within these investment bonds. So the governments love it because it's made to be a long-term investment. Long-term investment in the realm that if you hold this asset for longer than 10 years, you pay tax along the way and you pay no capital gains tax extra when you pull the money out. Now, the tax you pay along the way can be a maximum of 30%. Some of the different investment bond providers can have internal tax of a lot lower than that all the way down to zero. But importantly, none of the income it makes or the growth you get from it will go on to your assessable income or your personal tax returns. So if you think about it, if you're a really high-income earner, do you want to invest in your personal name where you're going to be taxed a really high tax rate.
Tom Gleeson
Yeah.
Stefan Angelini
Or if the money is invested for a long term, would you want to go through this investment bond structure which has a different tax element to it.
Tom Gleeson
Create a separation between yourself and the investment bond.
Stefan Angelini
Exactly right. So you separate your investment portfolio so that's where you can get even better, more tax concessions by having the tax paid investment bond structure where you get capped at 30%, but it can be a lot lower.
Tom Gleeson
Yeah. Is that common for it to be under 30?
Stefan Angelini
Yeah. Yes. So it all matters about the manager and the investment within it. Especially with Australian Equities. There's franking credits that come through dividends for Australian equities, and therefore that cleans up a lot of the tax scenarios. But yeah, different companies are made different in this environment. So it's all about choosing the right provider that you go with that can have more tax concessions.
Tom Gleeson
For sure. Next one is relevant to everybody because everybody's got Superannuation. So the tax in Super.
Stefan Angelini
We love Super.
Tom Gleeson
We do, don't we?
Stefan Angelini
Our objective is to keep taxes as low as possible, legally, of course. And Superannuation is probably the greatest environment because me and you, we're young, we're accumulating our wealth and we're growing. So all earnings in Super are taxed at 15%. So that's income that comes through. So if you've got an investment that makes $1,000, then 15% goes to the ATO and you're left with $850. But you remember how I spoke before about the capital gains tax discount? So if you hold an asset for longer than 12 months, you get a 50% discount on your personal name. Works a bit different in Super. So while your tax is 15%, you get a 1/3 discount if you hold the asset for longer than 12 months. It's what a lot of people don't know. So your tax becomes 10%.
Tom Gleeson
Yes.
Stefan Angelini
So if you made $1,000 on an asset you held for longer than 12 months, then 10% will go to the ATO. You'll keep $900 of it, which is a lot better than the other structures. And that's why we love Super, because even though you're growing and building your wealth, your tax rate is lower. Which means if you look at a long term benefit and on an each year basis, you're getting those little incremental benefits over time is going to make a dramatic difference in your long term scenario. So we love Super.
Tom Gleeson
Yes.
Stefan Angelini
Tom Gleeson
And that leads nicely into the final one, which I think is an absolute winner, which is pensions within circle.
Stefan Angelini
We love pensions, even though we're miles off, but they're a long way of life. So Supers are such a concessional environment because you can't touch the money. You can't touch the money until you're 60, 65 met what's called a Condition of Release. And when you've met this Condition of Release, and we're just going to say it's at 65 and not talk about the other ways to get it, a certain amount of your money in Super will have tax free earnings and you can pull the money out tax free as well, as much as you want. So I'll give you an example. If you buy something, people are buying properties, right? Let's talk about a property. You buy a property for $500,000 and you own that property in your Superfund for 20 years. And let's say then you sell it when you're retired at 70. So this is a 50 year old.
Tom Gleeson
Yeah.
Stefan Angelini
And you're in pension phase. Then if that $500,000 property has grown to a million dollars, then in your personal name, you get a 50% discount on that, whereas in your Super, the entire growth is tax free.
Tom Gleeson
Yeah.
Stefan Angelini
So you get all of that back. There are limits on how much your Super balance can be. So at the moment so it's something called a transfer balance cap. So you're going to have a Super balance of less than, say, $1.7 million to have tax free. After that, it goes back to the 15% that I just spoke about. So there's limits on it because it's so good. But if you're in a long term asset you want to hold for a long term, you can have stocks in there as well, buy stock, just let it grow and then sell it when you're in pension phase. Then all the earnings on that when you sell it can be tax free for sure. And then when you're in when you're 65 and you want to generate income and you got this big sum of money that you say he's generating $100,000 a year. In your personal name, $100,000 a year is just like you're getting taxed $100,000 a year as an income. So, like you're earning a wage of 100 grand a year. So you might pay 30 grand, 30 grand a year in taxes. Whereas in Super, that 100 grand comes through tax free.
Tom Gleeson
Yeah.
Stefan Angelini
Hugely beneficial.
Tom Gleeson
Yeah.
Stefan Angelini
That's why we love Super.
Tom Gleeson
That's our favorite. And same to this one for us.
Stefan Angelini
Yeah.
Tom Gleeson
Very good.
Tom Gleeson
Okay, so just to wrap up, we've covered off on the tax structure, a personal name, family trust, company, investment bond, and then Super and pensions in Super.
Stefan Angelini
Yeah. Exactly.
Tom Gleeson
Excellent.
Stefan Angelini
Now, for anyone out there, if you're looking to determine what's the right structure for you, please go and speak to a financial planner. Please remember that no information in this is personal information or personal advice. This is all just general information. But if you are looking for that personal advice, please go and contact your licensed financial planner. I hope you've enjoyed this today. We've changed it up and got Tom involved. So, mate, thanks for stepping up. This is your first one and you nailed it.
Tom Gleeson
Thank you. Thank you very much for having me for sharing your insights. And yeah, looking forward to plenty more.
Stefan Angelini
All right. Beautiful. Thank you, everyone.
Tom Gleeson
Thanks.