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SUMMARY: Super, personal name or trust structure? You must consider all of the options when looking to create family wealth.
There comes a time in most people’s lives where the constant struggle to stay afloat is superceded by thoughts of creating real wealth.
There is spare money left over, monthly, after life’s expenses are covered. Thoughts turn to how you make the most of it.
At this point, the first consideration is usually what to invest in, followed by in whose name, husband or wife, should further investments be made.
But these aren’t the only options and many mistakes with permanent ramifications are often made at this point.
Creating real family wealth should start out with a roadmap that takes in a combination of what you’re trying to achieve and when you’re hoping to achieve it.
Superannuation, particularly self-managed superannuation funds, are an awesomely powerful investment vehicle. But super is, by no means, the only investment vehicle that should be considered.
For younger people, the main drawback of superannuation is access. Super is a “tax versus access” structure for investments. In return for low tax rates, you’re not able to access your super until you reach a certain age. (This is currently 55, moving to 60, if you were born after mid-1964, and this might also be raised by legislation in years to come.)
Putting assets in your own name comes with ultimate flexibility and access, but also with full taxation. This means up to, currently, 49% for income earned and up to 24.5% for any capital gains.
Super comes with tax rates of 0% or 10% for capital gains, or 0% or 15% for income.
Trusts come with the same tax rates as individual rates, but with the flexibility of determining what income/gains are distributed to whom.
So, what do investors need to consider?
The two big questions are: What are you trying to achieve? And when will you need the money?
Keep those questions in mind and the decision on structure becomes so much easier.
Some investment horizons are short term. We are not going to deal, today, with those that are under, say, five years.
Superannuation – pros and cons
Low taxation. Forever! This is the major benefit of superannuation.
Under current rules (which are increasingly looking like they could be changed), you’ll never pay more than 15% tax for anything earned in super.
What isn’t properly understood about super’s tax rates is the compounding nature of those low tax rates. The extra funds, instead of being taxed, stay in your account and continue to earn money, which are then also taxed at lower rates. On and on this goes, year after year, until you start to access the money.
But, wait a minute. It continues on after that. Once you turn on a pension from super, there is no tax paid (currently) and the compounding goes into overdrive. Earning money on which no tax is paid … clearly there are huge benefits to that.
Once you turn on a pension, there is no tax inside the pension fund. And, if you’re over 60, there is no tax paid on the outside for income paid to you either.
The downside? Access. Those born after 1964 can’t even begin to access super until after they are 60. And this age might rise in years to come.
Money in super can’t be used to educate the kids. It can’t be used to replace a clapped out car or to fund an overdue holiday.
Simply, you can’t push every spare dollar into super, particularly if you’re on the good side of 50, because you might need it before you turn 60 (or 65, if you don’t actually retire before then).
Trusts – pros and cons
The main benefit of trusts over super are that access isn’t such a problem. Funds can, technically, be distributed to beneficiaries at short notice. But they can stay there protected, for decades, if required.
Trusts allow far greater protection than investments held in personal names. They are often the best investment vehicle for those who need to consider asset protection, such as those in industries who might be might be sued or face personal liability issues (such as those in medical or legal professions, or those who are self-employed).
Income from trusts can be distributed to trustees, according to the trust deed’s rules. But trust deeds, at set up, are usually kept reasonably flexible, or as flexible as is required by those setting up the trust (who also might wish to set it up so there is little or no flexibility). So income and gains can usually be passed to those who can benefit from it most.
The downsides of trusts are that they don’t allow for negative gearing to be passed through (see individuals in next section), and beneficiaries must pay full tax on income and capital that is distributed.
There is also usually a cost to set up and maintain trusts.
Trusts, whether family or unit, are often the best vehicles for holding family small business interests, or assets that you wish to hand down to future generations.
Individuals – pros and cons
Clearly, the easiest and cheapest way to hold assets is in personal names. There are no set up costs, from a structural perspective.
You can buy and sell at a moment’s notice and take gains immediately to make use of as you see fit.
However, full tax must be paid on income and gains, in the name of the person who held the asset.
It can be difficult, even costly, to shift ownership when originally placed in your personal name.
Long- versus short-term investments
Truly long-term financial aims, and investments, should usually be placed inside superannuation, if possible. If you know that you’re not going to need certain portions of your money until retirement, the benefits of low taxation (compounded) of having that money inside super, will generally provide the best solution.
The closer you get to retirement, the easier it should be to determine whether sums of money should be place inside superannuation.
Lower tax, on an ongoing basis, allows you to invest more of your money for longer.
Everything that you need to hold outside of super is, then, a trade off. If you might need access to funds – and inevitably you will need access to funds before retirement – then certain portions of your funds need to be held outside of super.
But in your personal names? Not always. And considering trusts, for holding those assets that you wish to retain some flexibility (and protection) for, should be part of more people’s planning, from earlier in their lives.
The closer you are to age 60, the more likely that superannuation is going to be the best investment vehicle for you.
But for those under 40, or potentially even under 50, who might need access early, but need protection for those assets, a family or unit trust might provide the right structural solution, to fit between superannuation and holding assets on an individual basis.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.