She's On The Money - Ownership Structures of Investments Part A

Episode Date: September 5, 2023

Before you purchase an asset it’s important to consider the most appropriate investment structure to use, because getting it right at the beginning can have significant long term benefits, and getting it wrong can be expensive to sort out! So today we explain ownership structures of investments. We look at how to choose the kind of structure for your needs, breakdown what they are, and SO much more. Acknowledgement of Country By Natarsha Bamblett aka Queen Acknowledgements. The advice shared on She's On The Money is general in nature and does not consider your individual circumstances. She's On The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs.  Victoria Devine and She's On The Money are authorised representatives of Money Sherpa PTY LTD ABN - 321649 27708,  AFSL - 451289.  See omnystudio.com/listener for privacy information.

Hello, my name is Natasha Nabanunga-Bamblett. I'm a proud Yorta Yorta, Kernai, Wolperi and Awadjeri 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 Awadjeri 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. Let's get into it. She's on the money.

She's on the money. Hello and welcome to She's On The Money, the podcast for millennials who want financial freedom. My name is Bec Syed and with me today is Victoria Devine. Hello. Hi, Victoria. Are you excited for today's episode? I'm pretty stoked about it. You're a liar. You are not telling the truth at all. I am.

I feel like by the end of this, hopefully I'll know what any of this means. You'll be like, why are we even talking about this? It's important, I promise. Is it? Yeah, it's so important. Okay, I trust you. At the end of the day, I'm not going to spoil what the topic is because it's your job to do it, but like picking the right one means you'll make more money and you like money. Spicy.

Okay. Well, let me get straight into it. So basically, V, today we are more investment focused. Sexy. You will be telling us about ownership structures of investments. Hot. Now, this is not an episode that you already need to be an investor to listen to, right? No, absolutely not.

In fact, you are in the perfect spot to listen to this if you're not an investor already because it can help you when you go to like pick how am I going to invest for the first time because one of the issues that you run into and like it's not to scare anybody who's already invested, like you're fine. I promise you are absolutely fine and you're probably investing 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. 100%. And also I will one day care about this stuff. So I'm glad that we're learning about it. But I really don't. And I'm happy to admit that on the podcast that I co-host. Well, exactly right. Just in case someone else is listening, needs the information, probably won't do anything with it right now. But it's good to know. I'm here with you. I see you. I see you. So V, it's actually well-timed for those who are

thinking of starting their investment journey. Exactly. Which is why I think it's important to know all of this stuff before you purchase an asset because it's really important to consider, I guess, the most appropriate investment structure to use. Obviously, getting it right at the very beginning means that there's long-term benefits. You don't 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 10, 15 years down the track and then go, oh, damn, I'm back and 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, V, 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. I just can't believe I haven't thought of it yet. And I'll be like, oh, 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 15 to 20 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. 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 $10,000, whether it is $100,000 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. Oh, 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? It actually kind of does. You know, I love a bit of juice. We do. We do. So I guess when it comes back to investment structures in general, an investment structure refers to how your investment is legally owned. And today we're going to break down the different kinds of ownership models 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 super versus when you own it individually

and what a HIN is because I've had a lot of questions about what a HIN is, but we'll get there very soon. Okay. Oh, I'm excited. So first, V, what kind of things should we consider to help us choose which investment structure is right for us? First things first, the first question you should be asking yourself is, Bec, if your investment is making money, who should get that money. So is it going to be income that is going to be for now or is it income that is going to be for the future? Is it income that in the future you want your children to have access to, whether you have them now or you're planning on having them in the future or you don't know but you want that option to exist? 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 were 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, Bec, have you thought about a trust? It's more, Bec, 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. Yes, it is a responsibility. It is the best next thing. So if I can't be there for my husband, Bec, I want to make sure that he's financially 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, Bec, 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 they think there's this common misconception that it's luck. Oh, you're so lucky to have had that and now be able to buy a 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 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, Bec, but you also have a daughter and in a will, it was written, Bec, you get the money, but X, Y, Z needs to be used for your daughter's education or 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 is a lot to think about. 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. If this is all very confusing, see a financial advisor. 100%. Pause your podcast and re-listen to that all. But if you are up to scratch and you know exactly what we're talking about, then let's jump straight into the different

types of investment structures. All right. First things first. Okay. Individual ownership or direct ownership. So most common, and it's actually the simplest investment vehicle, is basically a person holding an investment in their own name. You went on the Sharesies site, you signed up, you put all of your personal information, you now own those shares directly. That is in your personal name, either singly or jointly. You might have signed up with a partner and that is split. Investments in an individual name, 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 geared 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 Victoria Devine of me. Of course.

The cons, right? You 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.

Individuals in high-risk occupations, they could be sued and their assets exposed to risk from creditors. Okay. That's not that sexy. Yeah. means like hypothetically, if you were to sue me, Beck, I'm worth nothing. So cute. It's really cute. Damn it. I was actually planning on. Yeah. I thought you might. I'm worth nothing. I have a trust and we'll get into that and why I have a trust. And I'm happy to talk about, you know, the structure that works for me that, you know, if something really bad happened with She's on

the money, I don't want the property that I own or the shares that Steve and I have worked so hard to invest in being on the table for somebody to take from us, which would significantly impact my lifestyle and the life that 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 I own a dog. I'll take the dog. I don't even own a car, Bec, technically. Oh, I'm now following. I don't even own anything.

That's, oh. Yeah. Do you own a TV? I'll take a TV. Yeah, I think I have a TV. Maybe some flour in your pantry. Yeah, you could take my pantry items. I'll take it.

I'll take the pantry items. Yeah, easily replaceable. Okay, well, I'm still going to come for you. Okay, sorry. Sorry, please still love me. And then the other negative is negatively geared assets that are held by an individual will actually eventually become positively geared, resulting in increased tax liability over time. That's a con and I've written it down as a con, but essentially if you make money,

you have to pay tax is what that one is saying. Okay. So like if you're going to make money on your investment, you're going to have to pay tax and it's going to 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 geared asset is for one day to 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. I got you. I got you. I got you. Okay. So I guess my next question is what is a partnership? All right. So a partnership is also a relatively simple structure when it comes down to it. And the cost of it is fairly low when

it comes to just setting up a structure like this. A partnership, as opposed to holding an investment in joint names, is actually a separate entity for tax purposes and requires its own tax file number and complete tax return. So that's another 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 it 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 $100 and you're declaring $100, that $100 cannot stay in that partnership for the next financial year. It has to be taken out. And if, Bec, you and I established a partnership together and it was a 50-50 split,

it means that legally $50 has to go to you and $50 has to go to me because the partnership can't hold it. I see. It's not a place you can store money. Oh, I see. Okay. But you said something about not being taxed. Does that mean if you both made $50 each, would that be income? Yeah. So it would become income for you and it would be taxed at your marginal tax rate. However, that entity has to do its own tax return and operates as an individual entity. So a partnership does not pay tax, but as I said, it has to distribute the income to the individual partners according to the partnership agreement and then you would pay tax on that new income that comes in at your marginal tax rate. Okay, I got you, I got you. Right? Yeah. So

something to be mindful of there is that there is no risk protection in a partnership as the assets of either partner may be subject to claim by creditors as all partners are jointly liable and this means that one partner could become personally liable for all the debts of the entire partnership. Are you really at the cons right now? I put together the pros and cons on this one. There wasn't a separate pros and then cons list. It was like a, here's all the information you need about it because I have ADHD and can't stick to a specific format. Okay. Well, that makes more sense. But I told you and you've got the information you need. Absolutely. Okay. I'm hearing you. I'm hearing you. Actually, I just want to ask, what is the point of a partnership?

I mean, I guess you can't give any advice, but what I'm hearing is I would just go an individual. ownership? It's so that it's not owned in your individual name and it can be, you know, constructive to distribute income. Obviously there's a partnership agreement, so you might both jointly own it, but I might have in my agreement, okay, well, you know, let's pretend I'm a lower income earner than you. Maybe we have an agreement that it's 50-50 owned, but we distribute a lot more of the income to me because I'm on a lower tax bracket. We declare it under my tax bracket, but you and I, we're 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. 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 100% of the income had to be distributed. So we might've chosen to distribute it all to me this year, but you're still the owner, Bec. Oh, I see. Okay. So it doesn't have to be 50-50. Well, it doesn't have to be, but it would be based on the partnership agreement and how all of that works. And that's something that you would sit down with your accountant and talk through. And one of the reasons might be because you don't want a complex structure. You don't need a trust to be set up because trusts can be expensive to maintain and also to do all of the audits on,

and 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. And then, you know, when we're both back in the workforce full-time, we just split it 50-50 and that's easy. Gotcha. Clever and legal. I like that. Now, what about companies? All right. So, companies are most often used as a structure for business rather than for investments, but you can choose to hold investments in a company. There are a couple of benefits. Let me go through this. We're back to the pros cons list. So the tax rate on profits in a company is 28.5% or 30%, 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're big dog, you're baller. So you're paying 48.5% personal tax. A company rate might actually be more effective because you get 28.5% or 30% tax instead of the 48.5%. Gotcha. 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. I gotta be honest, I don't know if I got any of that. Are you able to translate?

So losses can only be offset against future income. So if we made a loss on an investment this year and it was in your personal name, Bec, and again, I'm not an accountant, so talk to your accountant about what this means for you personally. However, you could offset it against your income from this year. So say you earned $50,000 from your full-time job and then you had $15,000 worth of shares, but they made a loss. If you're doing your personal tax return this year, that loss can be declared an offset against your $50,000 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 $10,000 last year. So I can next year, use that $10,000 as 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 and pay as less tax as 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 ASIC 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 $200 that you pay for your individual tax return at the accountant. Like I'm paying, I think around $1,500 to $2,000 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 at it 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 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, Bec, 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. Okay, V, I feel like that is so far a lot to take in. Let's have a little break. On the flip side, we're going to be talking about trusts. Oh my gosh, I cannot wait.

So I feel like trusts are a really popular investment structure, but they are often very misunderstood. And there's a fair bit to get your head around when it comes to a trust, right? So a trust is formed by executing a deed, which documents the establishment of a trust. So go down to your accountant, you explain that you want to trust, you know, your accountant could provide some advice on this. A financial advisor could talk you through this as well. We did 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. Really? It's honestly insane. Like, I remember when I used to do it. So I did it for

me. Great. No worries, ma'am. Thank you, ma'am. Sign here 600 million 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 the 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 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, Beck, and it's been so easy. This is going to be the worst meeting that we do. I'm so sorry. Come in. We have to sign your trust documents. And you're like, what are you talking about? That can't be that bad. And then I like give you this slab.

It's like half a ream of paper. And I turn it around and be like, do you want to coffee or tea? Like I've put this stickers everywhere. You need to sign here. Your partner needs to sign here. I need to sign here and witness this. Like it 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'd be like, no, I'm so sorry. I'm so sorry. But at the end of the day, like it's important to set it up properly and that makes sure that everything is well and good. Can I just ask, have you ever had a situation where someone like signed something in the wrong spot and then you've had to start all over again? Do you know how hard it is? And then you have to go back to your computer and

be like okay well what page was that oh it was marked as page 86 but on the pdf it's page 87 hold on let me check all right let me just print page 87 and then it prints a page 86 and then you have to like reprint the page and slip it back in because you can't just white it out like anyway that's a nightmare that used to happen all the time or people being like oh can't you just 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 copy 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. Because people would 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. Yeah. That's what they want. Exactly. They've got to do it. So a trustee of a trust, it might be a person or a number of people or a company. Okay. So what happens is you set up this trust, right, and it's this little floating entity and it exists on its own. It owns itself. But then I might be nominated as what's called a beneficiary.

Sure. So I've got, you know, I'm not going to tell you the name of my trust because it's top secret, super squirrel. But the cool thing about trust is actually you can pick any name. Oh, that's cool. Like you could be real sassy 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. I don't own that trust, but I'm nominated as a beneficiary on that trust. Right now I'm nominated as a 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 ANZ, 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 she's 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 sneaky. 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? It's all set up. Wham, bam, thank you, ma'am. 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, good question right here. Do you know the difference between net profit and gross profit? I believe, and I always get these two confused, but gross is before tax. Net is after tax. Yes, that is perfect. Do you know how I remember it? No. Gross is gross because it's disgusting to look at what you could have taken home. Gotcha. But you didn't. A net is what you actually scooped up and all the water fell out and you just got the fish. That is really clever. Yeah. Yeah. So that's the difference between gross and net profit. But yeah, gross profit, I believe it's gross because when you look at it, it's what you could have taken home, but you didn't because then you had to pay tax. Makes you feel sickly.

Yeah. You're not going to forget now. But franking credits can also be distributed to the beneficiaries. That's so sexy. Yes. Bec, what's that mean? That means that. My favorite part is like, you're like, yes, a franking credit. I love this for us. And I'm like, Bec, what's a franking credit? And you're like, I have no idea, but it sounds so sexy. Sounds very exciting. I trust you. I trust that it's exciting. You are not wrong. So a franking credit, you bought a share in ANZ and it made some money, right? ANZ is a massive company. So they pay tax already on their profit, usually at 30% because they are a big organization. So what happens is when that money goes to you and you

get your profit, there's like a little tag. I just like to see it as a tag. It's not an actual tag. It's called a franking credit, but it's like a little tag that gets added to the profit that you took home. And you take that tag and you go, hey, here's my receipt from ANZ tax man. It says that ANZ already paid tax to 30%. And it means that you only get taxed the difference between that 30% and your marginal tax rate instead of being taxed an additional 30%. So this happens in superannuation. So this is not something that you usually get to take heaps of advantage of. They're most powerful inside superannuation. And I say this because inside superannuation, this usually means that you get a bit of a refund because the super

environment taxes your money back at 15%. Okay. A franking credit is 30% usually. Right. What's the difference there? An additional 15%. Yeah. So usually a sexy franking credit inside superannuation means a 15% refund. Okay. Kind of hot. Yes. So like think of a franking credit as a little tag that comes along with your profit to say tax was already paid on this and because we're a really big company, we're disclosing that and you get this little sexy franking credit that hopefully helps you make more money. I love that. I've always wondered what a franking credit was, to be honest. It always makes me think of like casino chips and I don't really know why. Yeah, like let's see it as a little chip that you get given to say it's like an IOU certificate that

goes on there that says IOU, like you don't have to worry about the tax. But a trust, it can't distribute its losses. So like if it made a negative return, like let's say the market were off and your portfolio actually made like negative 10%. Sucked, but like it's off. You can't take that negative 10%, give it to a beneficiary and have them claim 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 thing. You might have lost money this year, Bec, but actually next year, if you make money, don't worry because we've got that little credit up our sleeves to say last year we lost 10%.

So this year, if we make 12%, we're going to like add that 10% and then you just look after the 2%. 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, Bec, 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 10 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

10% in a bull market where the market is just aggressively going up, all your mates, they're making like 13, 14% on their share portfolios, Bec. If in that circumstance, you're making negative 10%, we really need to talk about it 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. It's like when we went through COVID, everyone was absolutely terrified because their portfolios were off. But my friend, the entire economy was off. So it made sense that your share portfolio was reflective of that. And that's okay. You can't beat the market.

I wish you could. But at the end of the day, I think that's a good, you know, little bit of a sense check. Like if you're worried about your own portfolio, I was recording my audio book the other day, Bec. And like I said, 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. That's really solid advice, V.

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? Ready.

So the first is a discretionary trust. Sure. So the trustees 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. And 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. It's owned by the trust, baby, which is why I was saying before, I'm worth nothing. Oh, my God. Creditors of an individual can't access any assets held by a trust. Creditors. Also your ex-boyfriend.

Oh, my God. Or girlfriend. Yeah. Or ex-human that you used to have a relationship with that is now salty that wants your stuff. 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, now's the time, my friend. Yes, very clever. So creditors of an individual can't access any asset held by a trust and beneficiaries who receive capital gains can claim the 50% capital gains discount where the asset has been held for more than 12 months. Okay. I think that makes sense. Next is a unit trust. Okay. Strap in. This one's very exciting.

A unit trust is one where the assets are held and administered by the trustee of the trust for the holders of units in the unit trust. This means that unit trusts predetermine the unit holder's entitlements, which may be for income, capital, or both. So this is less flexible. Mm-hmm. Unit trusts are often used where unrelated parties run a business together and for managed funds where investors 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, please. Okay. So I have what's called a discretionary trust for my personal assets because I'd love

to be able to in the future say, oh my gosh, Bec, I'm having kids. This is the most exciting time in my life, I'm going to add my kids to my trust so that if something happens to me, it goes straight to them. Once they turn 18, Bec, I can start distributing income to them and getting some tax benefits, which is really nice. I have to wait 18 years for that. 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 18? Because they are irresponsible? No, it's actually not that. It's because after kids earn $416 or get distributed more than $416, they have to pay 66% tax. What?

66%. That's higher than the highest marginal tax rate for adults in Australia, which is 48.5%. That is so ridiculous. It's to stop rich people from using their kids as tax vehicles. Oh, but what if there's like a 17-year-old who literally has to leave home because they Yep. You're going to have to deal with it. And like, I mean, there's always going to be with the government and with regulation, there's always going to be outliers and reasons why it might be really good to be 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 $48,000 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 48 and a half percent that they should have been paying because they were using their kids, they were dropping an Inbex account and then transferring it back to the parents. That's brutal. And I mean, I don't really know the ins and outs of it all, but for kids who literally need to work because they can't afford food. No, no, no. It's different if they're earning their own income. Okay. It's different if they're earning their own income. So it's not the same if you are, you know, 14 years and nine months and have your first job. That's a different story. Very different story because you're working for that income, which is very important to clarify. But if I was distributing money from

a trust, the tax rate is very, very high, which I think is very important to recognize because that's also why a lot of people don't purchase shares in their children's names. 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 18. Gotcha. Because of tax. Because of tax. Exactly. Pesky. So discretionary trust, that's what I have personally, Bec. However, you guys know I own Zella Money, obviously the world's greatest mortgage-broking company, but I own that 50-50 with Kate Bransgrove, and I adore Kate. She is one of my best friends. She is literally the nicest human I have ever met.

I don't know anyone I like more than Kate. Sorry, Beth. What about me? You know what? You're great too. But at the end of the day, I like Kate so much that I went into business with her. Kate's pretty cool. But Kate and I have a 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 50-50 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 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 predetermined 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, Bec, can I have more this month than you had? No, no, no. Like it's set. It's predetermined. 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, Bec.

Okay. I think that's all slowly sinking in. It's slowly sinking in. So that's more for a company structure. I know that some people have used it for personal, but like seldom ever. Yep. Seldom ever. The next is a hybrid. So as you can probably guess, a hybrid is a mix of both. Hybrid discretionary trusts can 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 trustee. So it's much more expensive. However, 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 She's 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. Okay. I don't know about you, V. I am overwhelmed. I'm exhausted. so because it's turned into quite a chunky episode let's make part two we are definitely going to make a part two because there's honestly so much to talk about that i was meant to talk

about in this episode but then didn't so we're meant to talk about this structure of superannuation we're meant to talk about hin which is a holder identification number and i promised up the front but this is just blown out so i'm going to cut it here and we're going to do a part two which 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 chest 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 a, how do you individually own the share? And then how do you purchase the share on

the share market and own that? Does that make sense? That makes sense. I think it makes sense. I've been really excited to talk about trusts with you today. In fact, I really just wanted to break out a whiteboard and like draw it up and be like so this is the structure this is how a discretionary trust can work with a unit trust and a company and these all click together and this is what it looks like and maybe i'll do that one day on like a tiktok or something you're allowed i'm really excited no one else will care but that's all right all right let's go and we'll see you guys on Friday. Bye guys. The advice shared on She's on the Money is general in nature and does not consider your individual circumstances. She's on the Money exists purely for educational purposes

and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs. Victoria Devine and She's On The Money are authorised representatives of Money Sherpa PTY LTD ABN 321 649 27708 AFSL 451 289.