Today I’m speaking with Terry Waugh who you may know as TerryW from his online legal and tax tips. Terry is admitted as both a solicitor and barrister to the Supreme Court of NSW as well as the High Court of Australia and holds specialist qualifications as a Chartered Tax Adviser. He operates as a lawyer specialising in tax, estate planning, asset protection, and trusts for property and share investors.
Some of the topics in today’s episode include:
- What structuring options do investors have when owning or controlling assets – specifically property and shares? (05:22)
- Land tax – when is it relevant to property investors? (08:34)
- Do many people invest through a company and what are the benefits of doing so? (10:43)
- What trust structures work best for property and share investors? (13:40)
- What is a trust, how do they work and how do investors benefit from trust structures? (15:44)
- What are discretionary trusts and why are they so commonly used? (19:05)
- What are the main pros and cons of using a trust structure and when does it make sense to use one? (20:49)
- How does a trust structure protect your assets? (25:20)
- How do distributions work when investing through a trust? (27:10)
- Who can pay money into a trust and how does that work? (29:42)
- When does it make financial sense to set up a trust? (34:38)
- How much do trusts cost to set up and to keep running? (35:34)
- What is a bucket company and why would anyone use it? (36:14)
- Terryw’s Tax Tip #14 – Never park money in a loan – why avoiding mixed purpose loans is so important. (40:09)
- How to set up and execute a debt recycling strategy in 2021. (42:54)
- Are testamentary discretionary trusts a good option for preserving wealth for your kids? (47:49)
- Why Terry thinks that a testamentary discretionary trust is the ultimate structure. (50:00)
- Buying an investment property through a company structure. (54:06)
- Protecting your own assets when entering a new personal relationship. (55:34)
- Who is the best person to see for investment structuring advice – a lawyer, accountant or financial adviser? (01:00:12)
Downloading it now, Terry is a font of info at PC
He’s the man!
Brilliant! The quality of this podcast is only getting better.
I would be interested in understanding more about Terry’s comments that its easier to obtain finance via companies and/or trusts. Despite having a healthy income and multiple positively geared rental properties, I am finding banks just won’t lend me more money as I approach x6 my income in total debt. Terry’s comments are counter intuitive for me because I thought applying for debt via those structures would attract requirements for lower LVR and higher interest rates.
Also, I was confused by is the recommended structure in terms of companies, trusts, and bucket companies. Is the suggestion that shares/property are owned by company (A); which is owned by a discretionary trust (B); which then distributes to bucket company (C)?
I wonder how worth it this might be for an average punter compared to just investing via a SMSF might achieve much of the same effect (assuming you don’t mind the pre age 60 accessibility issue).
Great points mate. I think I’ll get Terry on the pod again because I had a bunch of people emailing me with questions. That’s the tricky part with complex structures… is the juice worth the squeeze? For the average punter… probably not. Also, it’s worth noting that just because you can save on tax doesn’t mean it’s the best option if it introduces more stress and work into your life. It’s a tough once with no right answer.
If my parents give me money for my children & I would rather open a share account for them instead of bank account, what’s the best way so I don’t pay tax personally for its earnings. I would want it to re invest until say they are 21 yo
Go for growth focused share I would say (e.g. paying next to zero dividend). That’s what I am doing now.
I am not a tax guy. I think with the fund being gifted, if you have full control or own the gifted fund, you, as the trusteed, pay the tax on income, which is a good thing I reckon because minor has astronomically high tax rate.
Great episode – lots of food for thought. The comment about simplicty at the end was also important. Tailoring your solution with a cost-benefit analysis in mind is the right approach. A crucial factor in making a Discretionryl Trust (for me) was the fact that my kids will be 18 soon and I can use their 20k tax free thresholds for a few years to save funds for them. Given my age (53) ,and the amount in the trust (500K), and access to the teenagers thresholds for 3 or 4 years each It sounds like makes setting up a bucket company to save on tax for 5 odd years sounds like hard work. (Maybe I will reconsider in 6 years).
I do all my own tax, the kids,a and the trust. At $416 distro each, the trust pays me back $400 a year (so not worth accountant fees), but for the years I can distribute the kids, it should save me 10K per year (50% of 20K income) or 60K over 6 years.. Adding bucket company (and another trust to pay divis into) sounds like it push beyond my skills and not be worth the work.
For someone on 47% tax and 1million in a trust, and more time than me to compound it, sounds useful. Lending money to the my trust sounds like a good tool and will look into that more. Is it better than 15% rate into super though? Thanks for getting Terry on.
Outstanding content – thank you!!’
Thanks, I really enjoyed this one too. I would be interested in a second podcast. I think the next one could be around tax tips as you did not get much time to discuss this.
Cheers. I think I’ll have to get Terry back on. The responses from the community has been great
I was nominated as a co-trustee as part of a will. This was really useful information and I would love to hear more about testamentary trusts. This is not dry stuff. Structure is a very important consideration.
It is so much to learn, I am still grasping. The discussion on testamentary trust was great for me special with young kids like ours.
Background – We have 5 year old twins, no other kids. We are renting ( and renting cheap, so not interested in PPOR at the moment)
I have one question though to check is this will help my specific case. Me and my wife are both working have about 260K income between us through our day jobs.
I am the high income earner between the two, roughly 70/30 split.
My question is that – Can I go with the Trust —> company route to save tax. If I were to go with this can (and how) How will it work in principle.
One other question – Scenario – We have 5 year old twins and we have a will through which we leave a ‘caretaker’ for all our financial assets. In case we die tomorrow, trustee will pay the kids through caretaker for payments/re-imbursment. If we die tomorrow, is this same treatment as discretionary trust would be ?
Tax can be such an overwhelming and confusing topic!
I have always found it a topic that is much easier to understand when hearing people talk about it rather than when reading about it.
I am sure with your increase in income over the past few years the amount of tax you have paid has probably significantly increased – has minimising tax payable been a focus of yours over the last few years?
I find it super fascinating how people like Jeff Bezos who earn so much manage to pay $0 in tax.
The focus over the last few years has actually been to simplify the portfolio (hence the selling of the properties). I set up the trust back in like… 2014 because I thought it was going to save us a bunch of taxes. It’s only been recent that the tax savings are starting to really pile up. But there was a whole heap of work associated with setting it up, maintaining it, applying for loans through it and a lot more. We have it now and I’ve already put in the leg work to learn about how it all works. So it’s nice to have now… but I tell newbies all the time that you don’t need it to reach FIRE in Australia and it might cause more head aches than it’s worth.
Hey there, I am just getting started on my FIRE journey and am planning to establish investment accounts with Vanguard and Beta Shares. I already have a Discretionary Trust, I set this up when I used to work at a start-up and it has never had any real activity within it.
My Trust deed has this clause – 6.2. Investment in Name of Nominee. It will not be necessary for the title to any property forming part of the Trust Fund to be registered in the name of the Trustee but the same may, in the discretion of the Trustee, be registered in the name of the Trustee but the same may, in the discretion of the Trustee, be registered in the name of a nominee of the Trustee or any other name.
Do I need to take any special action when establishing my investment accounts? e.g. use the Trust TFN and set it up as an individual? or I am best setting up a joint account. I suspect this structural detail is key, or does the above clause from the deed simplify that? Thank you for any advice!
Well, Tax is not ‘THE’ focus, just that listening to this podcast and he got me at the 30% flat tax rate which got me curious.
I also did some calculation in my own pay. An as per some crude calculations atm, if I take two months unpaid leave from work, I am still not losing as tax component comes down substantially. But I should put more in super as concessional, which is my plan anyways.
(I am not saying it absolutely equivalent, just the loss is less-ish)
Thanks AFB for another epic pod! I enjoyed it to the fullest!
I have put lots of thoughts into our personal situation thanks to your pod as we have been paying some fair amount of taxes due to our main jobs, rental income and dividend income….
We are still investing via individual capacity at the moment (I guess largely because of its simplicity and stress free nature) though we have been contemplating switching to trust + bucket company. So I would like to throw out a few thoughts to the like minded folks, I am not a tax expert, btw. These just are my thoughts.
1. If you have already accumulated large sum of wealth in your individual names (assuming your assets have substantial capital growth), I don’t think you could get those assets into the trust without triggering any CGT? So with trust, you would be most likely to star from zero and start to reinvest your returns in the name of trust.
2. Minor has high tax rate so cannot be an tax efficient trust beneficiary. So you might need to wait for your kids to turn 18. Or you might have a village of adult relatives who can be put on the trust like my mate lol. So you need to consider how many low tax beneficiaries can be at your disposal and if they are happy to be in that capacity, letting you minimize your tax, indefinitely.
3. If using bucket company, how tax-efficient-ly can you get the money out of the company. With Div 7A (I think?), you cannot just loan from the bucket company at 0% interest rate then ask the company to forgive the debt without any tax implication. If going down the loan path by the textbook, you need to repay the loan principal with interest (might be deductible to you) by physically saying good bye to your own money and the interest is tax assessable in the hands of the bucket company. Or the loan is deemed dividend, which will be taxed at your marginal tax rate. Or the bucket company pays dividend to you, which will still be subject to your personal tax rate. And if the bucket company receives fully franked div, then the bucket company pays this div to you, you will lose the franking credit as it has already been claimed by the bucket company. Then the div from the bucket company will be unfranked in your own hands.
5. Ongoing cost re maintenance.
6. If you are still relatively young or love what your day job and on high income, you will not receive any tax benefit from using the trust unless you guys decide to wind down your high paying main job or you have low tax trust beneficiary.
7. Trust cannot hold income unless paying the high tax rate (I think). Hence, using bucket company. But if money cannot be taken out from the bucket company in a tax efficient way any day in the week, I am not saying it is the end of the world as I guess some folks might not need to touch the money in the bucket company until retirement, but it kinda defeats the purpose of flexibility. Then why don’t I put the money in super or investment bond instead?
I look forward to the 2nd pod with Terry! AFB thanks again for your generous contribution to the community!
Those are some great questions mate. I’ll add them to the list for the next pod with Terry 🙂
Generally speaking, for most people (>95%) , a trust is overkill and only adds more compliance costs and accounting fees. I got talked into setting up a unit trust and a HD trust years ago by my accountant at the time for tax benefits and asset protection. However it caused more problems than I was gaining in benefits so I closed them down. Best to invest in your own personal name unless you’re an obstetrician or anesthetist with a high chance of getting sued