9 The truth about structuring

Question 1

What is an important consideration when buying property?

Answer 1

Whose name will it be purchased in?

Question 2

What should your aim be when it comes to wealth?

Answer 2

To control your wealth rather than own it.

Question 3

What is the distinction between lifestyle and financial assets?

Answer 3

Lifestyle assets are for enjoyment or non-financial functions, while financial assets are owned to make money.

Question 4

Give examples of lifestyle assets.

Answer 4

• Home
• Cars
• Clothes
• Furniture
• Jewellery

Question 5

Give examples of financial assets.

Answer 5

• Shares
• Property
• Managed funds

Question 6

What is ‘structuring’ in the context of wealth?

Answer 6

The way you own and control your wealth.

Question 7

What are the three key objectives of good structuring?

Answer 7

• Protect your assets
• Legally minimise tax
• Maximise your borrowing capacity

Question 8

Why is asset protection important?

Answer 8

To ensure that not every asset you own is at risk if you are sued.

Question 9

What is a golden rule of structuring?

Answer 9

Own your lifestyle and financial assets in separate structures.

Question 10

Who may have a higher risk of being sued?

Answer 10

• Professionals giving advice
• Tradespeople
• Those in the service industry

Question 11

What is a benefit of tax minimisation in structuring?

Answer 11

You can split your investment income so that those on the lowest marginal tax rates receive the biggest distributions.

Question 12

What is the disadvantage of buying property in your own name?

Answer 12

Poor asset protection and higher tax rates.

Question 13

What are the options for what entity you can buy property in?

Answer 13

• As an individual
• In a partnership
• A company
• A trust (including a superannuation fund)
• A combination of the above

Question 14

What is a disadvantage of buying as an individual?

Answer 14

Poor asset protection and no opportunity to leverage your borrowing capacity.

Question 15

What are the advantages of buying in a partnership?

Answer 15

• Quick and inexpensive to set up
• Can pool capital for more borrowing ability

Question 16

What is a disadvantage of buying in a company?

Answer 16

High cost to administer and not eligible for the capital gains discount.

Question 17

What are the advantages of buying in a family trust?

Answer 17

• Maximum asset protection
• Income can be directed to specific taxpayers

Question 18

What should you consider if you decide to own your wealth in your own name as a couple?

Answer 18

Split ownership of the assets across both partners.

Question 19

What is the tax implication of owning money-making assets in your own name?

Answer 19

You could end up paying more tax than you would if better structured.

Question 20

What is the maximum tax rate applied to individuals?

Answer 20

46.5%

Question 21

What is a rule of thumb for lenders regarding loan repayments?

Answer 21

Loan repayments cannot be more than a third of your income.

Question 22

What is the significance of being ‘maxed out’ in borrowing capacity?

Answer 22

You won’t qualify for more loans based on your income.

Question 23

What is the structure that Steve uses for investment properties?

Answer 23

Trusts (family and unit) to control investments without owning the asset.

Question 24

What is the corporate veil principle?

Answer 24

If a company is sued, the assets of its directors and shareholders cannot be accessed by creditors.

Question 25

What is the advantage of having a company act as trustee?

Answer 25

Eliminates the risk of personal assets being accessed if sued.

Question 26

Who are the key parties in a trust structure?

Answer 26

* Trustee(s) * Beneficiaries

Question 27

What is a disadvantage of having individuals as trustees?

Answer 27

Their personal assets may be at risk if sued.

Question 28

What is one way to maximize control in a trustee company?

Answer 28

Having only one director.

Question 29

What principle protects the assets of directors and shareholders when a company is sued?

Answer 29

The corporate veil principle ## Footnote This principle states that personal assets are separate from the company's assets.

Question 30

Who is the sole director in the example of a trustee company?

Answer 30

The author themselves ## Footnote This structure allows total control over asset decisions.

Question 31

What is a key benefit of setting up a single-director company to act as a trustee?

Answer 31

Control over assets without personal ownership ## Footnote It protects personal assets from being at risk if the trust is sued.

Question 32

Who is responsible for declaring income from trust distributions?

Answer 32

The beneficiary receiving the distribution ## Footnote The trustee decides how income is distributed.

Question 33

How can trust distributions be structured for tax advantages?

Answer 33

By distributing to beneficiaries with lower incomes ## Footnote This allows for a legal reduction of the overall income tax bill.

Question 34

What significant tax benefit can be claimed on capital income distributed to an individual?

Answer 34

50 percent capital gains tax discount ## Footnote This applies if the capital income is allocated correctly.

Question 35

What is the potential tax savings from using a trust structure versus individual ownership?

Answer 35

$3600 compared to individual ownership ## Footnote Tax savings can vary based on the ownership structure.

Question 36

What can using a trust potentially increase aside from asset protection and tax minimisation?

Answer 36

Borrowing capacity ## Footnote Multiple trusts can be used to source loans.

Question 37

What is required to secure a loan for a family trust?

Answer 37

Personal guarantee from the director(s) ## Footnote The trust must show that loans can be repaid based on the director's income.

Question 38

What is the maximum percentage to borrow to avoid issues with mortgage insurance?

Answer 38

80 percent ## Footnote This helps in managing borrowing limits effectively.

Question 39

Is it legal to use a trust structure to increase borrowing capacity?

Answer 39

Yes ## Footnote It's legal and ethical as long as all loans are declared.

Question 40

What misconception do some mortgage brokers have about guarantees?

Answer 40

That guarantees are viewed as debt ## Footnote This is not universally accepted among lenders.

Question 41

What should you do if initial inquiries about trust financing are unsuccessful?

Answer 41

Approach a different bank ## Footnote Creating a new trust structure can help secure additional funds.

Question 42

What is the first insight regarding lifestyle and financial assets?

Answer 42

Do not confuse lifestyle assets with financial assets ## Footnote Financial assets should be managed based on facts, not emotion.

Question 43

What is the goal of a good accounting structure?

Answer 43

To control rather than own everything ## Footnote This allows for profit benefits while minimizing tax legally.

Question 44

What is the downside of buying property as an individual?

Answer 44

Limited borrowing capacity and poor asset protection ## Footnote This can hinder financial growth.

Question 45

What should investors avoid regarding partnerships?

Answer 45

Partnerships between entities with unlimited liability ## Footnote This increases risk exposure.

Question 46

Why should appreciating assets not be bought in a company structure?

Answer 46

Companies are not eligible for the 50 percent capital gains tax exemption ## Footnote This can lead to higher tax liabilities.

Question 47

What is problematic about buying negatively geared property in a trust structure?

Answer 47

Trusts cannot distribute losses ## Footnote This limits tax benefits for losses.

Question 48

What should be considered when planning a portfolio with multiple properties?

Answer 48

Borrowing capacity ## Footnote Choosing the right structure is essential for financial strategy.

Question 49

What is the only time a trust has to pay tax?

Answer 49

If it has income that has not been distributed ## Footnote This highlights the importance of distribution strategies.