Aussie Firebug

Financial Independence Retire Early

The Curious Case of Franking Credits and The FIRE Community

The Curious Case of Franking Credits and The FIRE Community

Something bizarre is happening and I have no idea why.

It’s to do with the Franking Credit changes that Labor are proposing to make if they win in this upcoming election.

This article is not going to go into whether the changes are good or bad, or even a technical breakdown of the franking system and how it works. In fact, the target audience for today’s article are people who understand the franking system and what the changes propose to do.

What I’m going to cover is the strange phenomenon I’m seeing more and more of as we inch closer and closer to the election.

Let me introduce you to ‘The Curious Case of Franking Credits and The FIRE Community’

 

What’s Being Said

Assuming that you’re up to speed with the debate at hand, I’m going to go over the most common arguments I’m seeing online and give my take.

 

“Franking was introduced to stop double taxation not to give refunds. Howard–Costello changed it in 2000. It was never meant to have refunds”

The reason that the franking system came about in the first place was from an independent review into the Financial System in the 1979 commission by the Fraser Government. This resulted in the ‘The Campbell Report’.

The fundamental principle behind dividend imputation is to ensure that income is taxed once by those obliged to pay it. 

If someone does not receive the franking credit when their tax obligation is zero, they have paid additional tax when they should not have. This means that they have paid more tax than others who earn the same amount but through other means of incomes such as rental, PAYG, sole trader business, bonds etc.

For example:

  • Person A works part-time and grosses $16,000 a year. They are under the tax-free threshold and don’t pay any tax.
  • Person B operates a small sole trader business that nets $16,000 a year. They have no tax obligation.
  • Person C is retired and owns part of an Australian company through shares that bring in $16,000 a year. Person C receives a fully franked dividend of $11,200. Person C at this point has effectively paid $4,800 in tax on their $16,000 income. Under the current law, the ATO refund the $4,800 to keep things at an even playing field and treat all income fairly no matter how it was earnt.

If you remove the refund, Person C has to pay $4,800 in taxes when they are only receiving an income of $16,000.

Now back to the point.

The Campell Report did, in fact, have refunds included in it!

Cambell Review – 14.40

“Lower income shareholders would not be disadvantaged compared to present arrangements. Assuming company distribution policy remained unchanged, they could expect to receive the same distributed ‘income’ as at present; moreover, additional after-tax ‘income’ would be forthcoming where the tax withheld at the company level exceeded the tax applicable to the individual.” 

AKA a refund!

What actually happened was the Hawke-Keating Government in 1987 implemented the ‘interim’ recommendation of the Campbell Review. This was not the original recommendation and ended in 1999 following the Ralph Review which introduced the refund of excess franking credits under the Howard Government.

The current system we have (which includes franking credit refunds) was designed by an independent body and was implemented with the support of both houses!

 

“A company and an individual are separate legal entities. A profitable company should always have to pay some tax. The franking credit refund is a loophole where the share payers can potentially pay no tax”

This is very clearly addressed in the Campbell Review.

Cambell Review – 14.6

“The fact that companies and their shareholders are separate legal entities is sometimes held to justify treating them as separate taxation entities as well. The Committee is not disposed to accept this view. It is not convinced that those who own or operate enterprises conducted under limited liability should pay extra tax for that privilege. Ultimately all taxes fall on individuals and, in the words of the Asprey Committee, it is ‘necessary to go behind the veil of separate legal personality which the company enjoys and translate the tax formally imposed on company income into a set of individual tax ‘burdens'”

Pretty straight forward. They might be separate legal entities but all tax eventually falls on individuals!

The company is simply prepaying tax for the shareholders. 

If you accept that franking credits can offset an individuals income to $0, you must accept the refund as the shareholder has prepaid more tax than they should have.

If you want to still argue this point. I’m assuming that you’re in favour of completely eliminating imputation credits altogether right…? Tax will be paid twice, once for the company and once for the individual. They are separate after all, right???

 

“These refunds are costing taxpayers billions each year. That money could be spent on schools, hospitals and roads. Why should the rich get a refund from the taxpayers?”

This is one of the first arguments from people who don’t understand how franking works. To be fair, most of the FIRE community-related arguments on this matter don’t raise this point. Because we fully know that the refund has absolutely nothing to do with other taxpayers and is simply returning money that is rightfully owed to the shareholders from which the money was earnt in the first place through the company!

I’ve yet to see anything that specifically stipulates that the ALP will use any revenue received by these changes on schools/roads/hospitals etc. What most likely will happen is any extra revenue will be added to the Federal government’s coffers where god knows what it will be allocated to.

Let’s take a little look at the fiscal management of the Government, shall we?

  • Same-sex marriage plebiscite for $80 Million – Clearly a stalling tactic the government used to postpone the inevitable. All good though, getting into power is much more important than using taxpayers dollars wisely.
  • Victorian government settles East West Link claim for $339m – Total cost for a road never built, between $800 million and $900 million.
  • $4 Billion Victorian desalination plant that’s hardly been used – To add insult to injury, it’s costing the taxpayers $649 million a year to keep this plant open even if it’s not producing water! I personally had a lot of friends work on this project and let me tell you, taking the piss doesn’t even begin to describe how much money was being thrown about on that job site. I’m all for unions fighting for their worker’s rights but c’mon… some of my apprentice mates were clearing $2,500 a week after tax whilst also getting $800 a week travel allowance and living away from home pay plus god knows what other EBA entitlements. Four or so of my mates were renting out a beach house in Inverloch and getting $800 a week each for travel pay… Inverloch to Wonthaggi (site of desal) takes 13 minutes 😐 I’m all for tradies earning as much as they can but when taxpayers dollars are used we need to look at the fiscal management of these projects… some of what was happening was a complete waste of money. This was one desal project, Sydney also have one that cost $1.8 Billion and is currently costing taxpayers $535 million a year to keep it in a state of hibernation. Other states have them too but you get the idea.
  • $51 Billion for failed NBN project – Telstra pointed to NBN information that there was $14 billion “of unrecovered revenue … that will ultimately need to be recovered from consumers within the current regulatory and policy framework”.

 

So what are we at now… around $20+ billion of wasted taxpayers money without even really trying (I’m allowing for some actual value of these projects to be returned).

Seriously.

These projects were off the top of my head and I did a bit of Googling to fact find. I’m sure there’s plenty of others out there that cost even more.

I have worked for the government for over 7 years and trust me when I tell you, we are not good at managing money/projects.

The late Kerry Packer summed it up best in 1991:

‘I am not evading tax in any way, shape or form. Now, of course, I am minimising my tax, and, if anybody in this country doesn’t minimise their tax, they want their heads read because, as a Government, I can tell you you’re not spending it that well that we should be donating extra.’

 

“Australia is the only country in the world that have franking credit refunds”

My response to this one has always been… so what?

I actually think it shows a sign of weakness from that side of the argument. I mean, what has that got to do with anything? There’s plenty of things unique to Australia.

Does that make us wrong?

No!

In fact, I’d wager that Australia must be doing a lot of things right as we are consistently ranked as one of the best countries to live in on the planet and our citizens are some of the richest in the world. There’s plenty of factors to attribute to these claims but it just strikes me as odd when people bring this point up as if it’s a bad thing 😕

 

The Propaganda Machine In Full Swing

The ALP are clearly trying to win votes from the working class by exploiting on their lack of knowledge around a policy they want to change (franking credits this time around) which is how politics have worked since the beginning of time.

They are spinning this debate into:

‘The rich aren’t paying their fair share’

Check out some of their propaganda.

Franking Credit Refund propaganda

I have no idea who ‘The Australian Institute’ is but they call themselves a ‘think tank’ but are clearly a propaganda machine.

I really enjoy the play on words with the poster insinuating that the taxpayers are somehow ‘spending’ $5B to refund franking credits whereas we know perfectly well that the taxpayers don’t have to pay for anything. The refund is simply returning the tax paid by the shareholder if they paid too much tax that year…like … you know… how it works with every other form of income.

But hey, good job PR team! Nothing is more likely to get votes than if you pretend you’re fighting for the working class and trying to get the rich to pay more tax so you can fund more public services.

So Robin Hood of you. In fact, Robin Hood is almost a perfect analogy because this policy is indeed stealing from the rich but I’m not sure about giving to the poor. As I’ve covered above, the government sorta sucks with money and to quote Mr Packer again, if you think that the money that is retained by this policy (assuming they are able to retain any money, which is highly debatable) will be going to these public services … ‘You’d want your head read

There are also other countless articles written by prominent financial figures with large followings that also raises eyebrows about the sincerity or purpose of some of the content that’s published.

 

The Real Reason Behind This Policy

It’s pretty obvious (to most) what’s happening here.

The real issue with this whole debate is the tax-free pension with Super. When you start to receive an income from your Super (pension mode) you don’t have to pay a single cent of tax on that income up to $1.6M. This means that because your taxable income is $0 if you receive Aussie dividends with franking credits attached… you guessed it, you will receive a refund!

The unsustainable tax-free pension mode of Super has been debated countless times and I’m not going to go into it.

But make no mistake about it, the ALP are targetting this and the FIRE community is getting caught in the crossfire.

‘But why wouldn’t they just change the law so there’s not a tax-free pension mode’ 

Because that’s not smart politics!

Does anyone honestly think that this move to axe franking credit refunds wasn’t strategic? Hell, half of the FIRE community doesn’t understand it well, how are we to expect that the general public will get it? The answer is they probably won’t. And I don’t blame them, it’s complicated and confusing. They are sold the dream that the wealthy will have to pay more tax (which will be 100% true) and that money will be used to fund public services (lol).

That’s a great PR campaign if you ask me. And incredibly hard to argue against because it’s so confusing.

Nevertheless.

Everything I’ve covered so far is pretty stock standard on the battlefield of the political juggernaut trying their best to win all of our precious votes.

But there’s something else afoot that I can’t figure out…

 

Where It’s Getting Weird

To summarise everything I’ve covered so far:

  • Franking credit refunds make perfect fiscal sense. They were designed by an independent body and implemented with bipartisan support
  • ALP want more revenue
  • They won’t directly tax Super pensions because that would be political suicide so instead, they have gone after Franking credit refunds and are exploiting the general publics lack of knowledge about how they work

Here’s my beef.

The entire reason this article exists is that I’m noticing a trend amongst the FIRE community where an uncomfortable number of members are not only in support of this change but are actively campaigning for it to go through.

This change directly affects the FIRE community!

If you are planning on retiring from Aussie dividends, you could be set back years until you reach freedom if this goes through.

Yeah yeah yeah I know you can tweak your investments to get around it and people did just fine without franking and all that but that’s not the point I’m making here.

My point is that a lot of the community is not taking an IDGAF approach. They are trying to argue for the changes that will directly disadvantage them and it’s doing my head in.

Here is what I’m talking about and I want to preface this by acknowledging that every single one of the screenshots below is from a FIRE or financial independence community group (Facebook, Reddit, forums etc). I have not included the whole quote or comment in some of the screenshots FYI.

From /r/fiaustralia

The first comment pretty much sums up view spot on. I’m glad to see it sitting on 10 points (basically an agreement for those who don’t use Reddit). But the response has nearly the same number of upvotes which would indicate that a significant amount of the sub (which was small when this was posted) would disagree.

*(this edited screenshot is not the whole post, just the part I’m highlighting)

Same sub as above. 27 upvotes for a post that clearly states that they won’t benefit financially from these changes but will be voting for them anyway. This was posted on a financial independent specific forum. When another member replies with what I would consider a pretty reasonable response, they get downvoted and are currently sitting on -7 points.

Another forum member glad that these changes will go through. But the community is really getting behind this comment with 22 points.

FFS Maureen

Some ALP propaganda posted on the ‘Mustachians Australia’ group.

19 Likes and 3 Loves.

The first comment is even a clapping hands emoji.

PEOPLE ARE CLAPPING ABOUT THESE CHANGES IN A FIRE GROUP. 

Australian Facebook group specifically geared towards reaching financial independence has the ALP propaganda we seen posted above… And wouldn’t believe it… It has 10 Likes and 2 Love reactions. People who are trying to reach FI are loving the fact that they will have to pay more tax… 🤔

Excuse me…

But what the actual fuck is going on? 

I fully expect to see these sort of posts and more importantly, responses from any other group in Australia. I think it’s unrealistic for the general public or anyone who these potential changes won’t affect to give two shits. But a good percentage of the FIRE community actively promoting and wanting these changes to go through is… confusing me.

 

Why Is This Happening?

I don’t really know but I have four theories.

  • The most likely theory I have is that there is still a decent amount of people in the FIRE community that still don’t quite know how franking works. The refund can be confusing to understand. Combine this with a slightly naive attitude towards how tax dollars are spent and what you have is a genuinely good-hearted person who just wants to spread the wealth around. All I would say to anyone who falls in this category is please consider direct donations to good charitable organisations. I have worked for the government for over 7 years. Trust me when I say that you are 100% better off directly helping out the less fortunate than you are by paying more taxes in hopes that it will be put to good use.
  • The FIRE community was once a smallish niche group that all had aspirations of escaping a lifetime of working a job they didn’t particularly enjoy. And then the word got out, and what started off as a relatively small group has grown exponentially. I suspect that there are a lot of people out there that are apart of FIRE groups, forums and pages that have no intention of doing what’s necessary in order to FIRE. Maybe the influx of FIRE phonies are delighted with this speed bump in our road to FIRE. This can best be described as Tall poppy syndrome.
  • Some out there have been drinking the ALP ‘Kool-Aid’ and actually think that franking credit refunds don’t make for a good fiscal policy.
  • And now it’s time to put your tin foil hats on…Although highly unlikely, is it possible that members of the ALP have infiltrated the FIRE community? I honestly don’t think we’re big enough for any political party to really care about, but maybe there are a few interns out there pushing their parties’ agenda… Stranger things have happened!

Conclusion

Guys, I get it.

You should never base your strategy around tax laws. The most important rule for investing should always be to invest in great assets (whether that’s locally or internationally). Tax strategies should come later down the track and we shouldn’t get too upset when they change or are abolished. This is to be expected at some point after all.

I’m not saying we need to band together to fight this (I’ve got better things to do), but for the love of God, we don’t need to be actively campaigning to disadvantage ourselves.

Maybe I’m missing something here, but I can’t work out why so many of us are happy to pay more tax to a government who has consistently shown its incompetency to spend money wisely.

I’m really interested to know what the community thinks.

Are you picking up what I’m putting down? Or maybe I’m just out of touch and need more faith in the government?

Please let me know what you think down below 👇.

 

Spark that 🔥

*Credit to these two Cuffelinks articles for most of my research around the history of franking. Article 1, article 2.

Filling Out A W-8BEN-E Form

Filling Out A W-8BEN-E Form

*Please consult a professional if you’re confused or not sure about anything when filling out a W-8BEN-E form 

Do you own a US domiciled ETF or share?  I own 2. VTS and VEU.

If an investment derives its income from the US, it has to pay tax to Uncle Sam. But What happens when I get the dividend from my US ETF or share? The company has already paid tax to the US and now I’m expected to pay full tax on the dividend?

Oh Hell Naw!

This is the purpose of the W-8BEN-E form. It stops double taxation so you don’t pay tax twice in two countries. You need to fill this form out for every ETF (or investment) that is domiciled in the US. If you don’t fill it out, you will get tax twice!

Here is a video of me recently filling out my W-8BEN-E form. I had to fill it out again because I switched my broker account from Commsec to Selfwealth and created a new HIN.


SIDENOTE

I’m sometimes asked why I own these two instead of just buying VGS (or VDHG but that will be covered in an upcoming post).

In a nutshell, I go with VTS+VEU because it offers:

– Lower management fees
– Greater diversification
– Exposure to emerging markets
– Unhedged against the Australia dollar (I think the AUD is high at the moment)

Don’t be put off investments because you need to fill out a very simple form every 3 years! I understand that it’s a little bit of extra work but seriously, we are trying to reach financial independence here! What’s a couple hour extra filling out a form and doing a little more come tax time for a superior investment.

The FIRE community is constantly recommending putting in a little bit of extra work and taking things to the extreme where others won’t, to enjoy a life other can’t!

 

 

Pay Less Tax Part 2- Salary Sacrifice

Pay Less Tax Part 2- Salary Sacrifice

Part two of my Pay Less Tax series which focuses on various strategies for lowering the amount of tax you pay here in Australia. You can check out Part One – Buying Assets In A Trust if you missed it. This strategy is pretty straight forward, you buy stuff with pre-taxed dollars lowering your taxable income which results in you paying less tax that year.

 

What Is Salary Sacrifice?

Salary sacrifice, also know as a salary package is an arrangement between an employer and an employee. The employee sacrifices part of their salary or wages in return for the employer providing them with benefits of similar value.

The key thing to remember here is that you’re using pre-taxed dollars when you sacrifice.

Lets consider someone who is earning $80K and needs to buy a new computer worth $4K. At $80K per year, this person would receive $60,853 dollars after income tax.

They could pay for the new computer out of this post taxed income of $60,853 which would then bring them down to $56,853.

If their employer let them salary sacrifice the computer to bring their taxable income down to $76K per year, they would receive $58,233 dollars after income tax PLUS their computer.

That’s a difference of $1,380 dollars saved. Imagine if you did this or something similar for 30 years. That starts to become a serious amount of saved taxed money that could be invested or spent elsewhere.

You really have to check what you’re company is offering when it comes to salary sacrificing. I’m pretty certain (please comment if I’m wrong) that most companies allow you to salary sacrifice into super. There’s a limit of $25,000 a year before tax contributions.

 

Make Sure You Check

There are no restrictions on what your employer can package for you so it’s really best to check with them. I know a place that allows their employees to salary sacrifice their home loan! Yes that’s right, their bloody home loan. I’m not sure of the details but can you imagine if you could pay off your home loan using pre tax dollars every year. Unfortunately my work only lets you salary sacrifice super which is no good to me for now. So go check with your employer. You might have an expense coming up soon that you could potential pay for using pre taxed dollars.

 

 

←Pay Less Tax Part 1- Buying Assets In A Trust

Pay Less Tax Part 1- Buying Assets In A Trust

Pay Less Tax Part 1- Buying Assets In A Trust

*Always seek the advice from a professional if you’re thinking about setting up a trust. The below is not legal advice, only my thoughts, and opinions.

 

I have decided to start a series of posts that will detail some of my methods of minimising the amount of tax you have to pay. Some of these techniques will apply to the way you invest but there will also be tips for people who are not at the investing stage just yet. And I’ll preface this post by stating very clearly

 

There is no legal way to pay no tax at all

 

Yes, you can negative gear your pants off but I’m not the biggest fan of that method. The idea is to minimise the amount of tax you pay by utilising legal methods. I love Australia and don’t have any problems paying my taxes to keep this awesome country running…BUT! That doesn’t mean I’m going to be donating extra money because lets be honest, sometimes the government doesn’t spend the tax payers money in the most efficient of ways…BB-WalkingDog

 

Paying Taxes

Just like income tax you pay on your wages, you have to pay tax on the income produced by your assets and also the capital gain IF you sell the asset and realise the gain (more or that later). Income produced by an asset that’s in your name is added on to your regular salary income and is taxed accordingly. Below is the ATO tax rates for 2015-16

Taxable income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000

 

Let’s say you have had an investment property that is earning you $20K from rent after all expenses including depreciation (that some serious cash flow!) and your normal 9-5 job earns you a salary of $65K. In this situation, the ATO look at your income and conclude that you earn $85K and tax you accordingly.
Below is a break down on the taxes you pay on the extra $20K income produced by your investment property

15,000 * 32.5% = $4,875 PLUS 5,000 * 37% = $1,859

=$6,725
The last $5,000 dollars you earned were taxed at a higher rate of 37c for each dollar because you went over the $80K threshold.

 

 

Buying With Your Partner

Now let’s assume that you’re buying that asset with your partner and you are each allocated 50% ownership of the asset. Your partner only works 2 days a week and earn $12K yearly.

 

Now the ATO look at your taxes very differently.

 

Because you only have 50% ownership of the asset you only earn 50% of its income, which equals $10K. This $10K is added to your income which gives you a grand total of $75K. Your partner is given the other 50% which brings their income up to $22K. Now, this is where the tax savings come in. The $10K that was distributed to you was taxed at a rate of 32.5c for every dollar.This equals 10,000 * 32.5% = $3,250 in taxes paid to the ATO. Your partner, however, is very different. They only earn $12K which is too low to be taxed at all. Adding the $10K bring them up to $22K. They have to pay 19c for every dollar they earn over $18,200. $22,000 – $18,200 = $3,800 dollars.
$3,800 * 19% = $722. The total tax you paid on the $20K as a couple is now $3,250 + $722 = $3,972

Simply buying with your partner in this scenario will save $2,753 in taxes every year for this couple. If they have the property for 30 years the money they would save would equal =

$85,590!

If you think that’s impressive, wait until I show you how trusts work

 

 

Buying Assets In A Trust

There are actually a few different sorts of Trust that you can set up for different reasons. I’m only going to be talking about discretionary trusts (Family trusts) as that is the vehicle I’m currently using and what I have experience in.

 

What is a trust anyway?

 

A discretionary trust is a trust relationship whereby the trustee is obligated to hold assets for the benefit of the beneficiaries of the trust. This obligation is defined in the trust deed which the trustee must enter into. It’s basically a written agreement on how assets are held and distributed among the people that that should get them.
You need the following to set up a trust:

The Settlor

The person that creates the trust. Usually is someone who will have no more involvement after the trust is set up. I used my accountant as the Settlor for my trust.

The Trustee

The legal entity that owns all assets held in the trust. This can be a person OR a company. Yes, that’s right. A company can be the trustee of a trust. Now, why would you want a company being the legal owner of assets?

 

Because this is how you achieve asset protection!

 

If you buy in your own name and for whatever reason go bankrupt. The creditors have full access to anything that you own to get their money back. But what if you don’t actually own any assets but simply control them? What you can do is set up a company and be the only shareholder of it so you have complete control of its decisions. You then set up a trust and have the company be the trustee of the trust.
The company is now liable for the assets held within the trust and not you!

If something goes belly up the creditors will have access to all assets that the company owns including all assets within the trust but not outside of it. This makes sense when you think about too. If you invest in a company that goes bust, you’re going to lose your shares most likely but the creditors are not going to try to recoup their loss from the shareholder’s personal assets. That would be illegal.

And it works both ways too. If you were personally sued and lost the case. They could not go after any assets held within the trust because technically you don’t own them. The company does upon which you are simply a shareholder of 🙂 . I plan to have multiple trusts set-up eventually to limit the losses if something went drastically wrong in one of them.

The Appointor

The person who appoints the trustee of the trust. Has the power to remove a trustee and appoint another one. Needed in case the current trustee dies or doesn’t want to be trustee anymore.

The Beneficiaries

The beneficiaries are the entities that benefit from the trust in forms of distributions.

 

The real magic of the trust is its ability to distribute income to multiple beneficiaries at the most efficient rate that suits for that financial year. Let’s say that the trust earns $40K. This can be from rent income or capital gains. The Trust has the ability to choose where to distribute this income to. If you lost your job one year and didn’t earn anything. The trust could distribute you $18,200 dollars and you wouldn’t pay any tax on it. You can distribute income to your children but it won’t be tax-free money, there are special tax rates for individuals under 18 who receive money from a trust. Back in the day, there was a loophole whereby trusts could distribute money up to the tax-free threshold for minors and get away with it. You can’t do this anymore.
If you still have income left over in the trust after you have distributed most of it to the beneficiaries in a tax effective manner there is another beneficiary that you can distribute to whose tax rate never changes no matter how much they earn. That is another company. You can actually distribute income to another company whose tax rate is locked at 30%.

This is massive.

 

Lets say you buy a house for $60K in 1980 and over the next 40 years it produces $300K in cash flow after all deductions and losses ($7.5K positively gears per year)

 

For simplicity, I have left out a bunch of things here but we are trying to keep it as straightforward as possible so it’s easy to follow. $300K taxed at 45c (assuming that the surplus of money is tax at the highest rate) to the dollar equals $135,000 of tax to the ATO…OUCH.

If you had bought that asset in a trust, however, you would have the ability to distribute portions of that income stream to multiple people and to a company which is taxed at 30%. Let’s say both you and your partner are currently at the 32.5c threshold and you have no children. It would be more strategically advantageous to distribute the whole $300K to a company at 30c to the dollar which would turn out to be $90K instead of $135K.

 

That’s a $45K saving in tax by simply having the asset in a trust. 

 

And the more you earn, the greater the savings are going to be. Income redirection along with asset protection is the reason I utilise this method. It gives me flexibility and security of my assets. I have used the above examples with properties but the trust works the same for shares.

Downsides Of A Trust

While I have painted a picture of milk and honey for trusts there are some disadvantages

  •  You cannot receive the main residency capital gains exemption tax which basically is when you sell your own home and don’t pay capital gains on it. This can be a strategy for an investor who lives in an investment for one year before selling to avoid CGT. You cannot do this with a trust.
  • There are costs associated with setting up a trust and company and running them. It cost me $1500 to have a trust and company professionally set-up. You can do it yourself for around $600 bucks but I don’t think it’s worth it in case you stuff something up. It’s $200 a year to register the company and an extra $300 bucks a year my accountant charges for doing the accounting for the company and trust which are slightly more complicated than a normal tax return. Considering the advantages I have outlined above it was a no-brainer for me to pay a little extra now and set it up right to reap the benefits in the years to come.
  • You cannot negatively gear in this structure. You cannot distribute a loss. You can carry it forward and offset any future gains but you can’t offset your personal income through a trust. This doesn’t really bother me because I don’t plan to negative gear when I buy assets. They might be slightly negative when I buy them but turn positive after 1 or 2 rental increases over time.

I hope you have gained a little more knowledge by reading this post. Investing through a trust is not for everyone or every strategy. But knowing it exists is beneficial in case you ever feel you could take advantage of it. I bought my first IP in my own name when I had no idea about trusts or how they worked. Unfortunately transferring an IP from your personal name to a trust will trigger CGT (if any has occurred) and you will be up for stamp duty again. For this reason, I will keep my first IP in my own name. I planned to buy all future IP’s in the trust I have set up. I will be paying slightly more upfront costs this way (running the trust) but will hope to reap huge benefits down the track.

If you have a better way to buy assets I’d love to hear about it in the comment section below as I’m always looking to do things better learning from people smarter than myself

Australian FIRE Calculator
Send it!
close-link
Get Calculator!
Get FREE Aussie Firebug updates, tips and tricks, and exclusive content!
Subscribe
No spam. Unsubscribe anytime.
close-link
Subscribe
Subscribe

Stay Connected!

Join others who get FREE Aussie Firebug updates, tips and tricks, and exclusive content!
SUBSCRIBE
close-link