In this week’s short market commentary “ the dust has not settled”  we hear from the team at Macquarie regarding their thoughts on the impact of growing Covid case numbers in the US and Europe,  as well as the all important US election next week.

Global equity markets were down sharply overnight as escalating COVID-19 cases throughout Europe and the US combined with another stalled round of US fiscal stimulus plans drove a bout of broad profit taking. We entered October and the final run-up to the US presidential election with a tactically cautious outlook so are not particularly concerned with overnight weakness.  We think the current set of factors affecting markets and confidence – primarily US presidential election uncertainty, another wave of COVID-19 outbreaks in Europe/UK/US, stalled US fiscal stimulus plans and extended equity market valuations – are all likely to remain short term drags which drive an attitude adjustment rather than a shift in cyclical recovery hopes.

In the near term, uncertainty is on the rise. This is because the eventual winner of the US presidential election might not be known for some time, the timing of a COVID-19 vaccine remains indeterminate and because political infighting is clearly delaying further US fiscal stimulus (potentially until early 2021). We still don’t think these risks are insurmountable. They simply require investors remain patient and focused on the broad underlying trends rather than getting caught up in the noise, which usually is not news. We do know that a vaccine is on its way, that US presidential elections have not led to an extended period of equity market weakness or a sustained rise in bond yields and that governments are better prepared for dealing with further COVID-19 scares and these are all positive.

We still hold the view that targeted rather than broad lock-downs will be used to address the latest COVID-19 spikes. Further lock down restrictions will likely shift baseline economic growth expectations lower in coming months (Europe is already sagging and leading this trend lower), but the assumption that most economies can avoid a return to the most severe of social containment policies still holds. This might seem at odds with latest COVID-19 cases, but there are a few key differences. First, hospitalization rates, have for the most part, remained low despite the rise in cases. Second, governments and health authorities are better prepared with tracing and therapeutics that can help mitigate the spread / impacts. And third, it’s hard to use the first wave outbreak as a benchmark given testing rates have dramatically improved (and broadened) over the past 6 month period. Nevertheless, conditions are fluid and downside risks to economic momentum are clearly on the rise – driving asymmetry and greater divergence between economies and markets into 2021 (i.e. China is booming, Europe & US look to be weakening while Australia should begin to benefit from successful containment and reopening of internal borders).

Ultimately, monetary and fiscal policy support should remain in place, but if the pace of this support slows (or is delayed) while economic momentum is already flattening, then this begins to undermine the V-shaped recovery built into risk assets. We think investors should focus on the medium-term outlook rather than getting overly concerned with near term outcomes which are more uncertain. We are confident that the combination of central bank and government policy support alongside a COVID-19 vaccine will underpin a stronger economic backdrop into 2021 and that this will be positive for equity markets, credit and alternative asset strategies. Rising volatility is expected and extended equity market valuations exacerbate profit taking, but, the path towards stronger growth should not be more than temporarily interrupted.

We don’t think the equity bull market is over and investors should remain positioned for further upside, be prepared to hold cash and wait till the dust settles. We don’t see bond yields going much lower, but limited inflation risk suggests an increase will be gradual and potentially modest. This drives our continued preference for credit over sovereign bonds and investment grade over high yield due to rising delinquency risk. Investors should look through this period of uncertainty with the intention of being positioned for a more normalized economic environment. This means taking advantage of any weakness to position portfolios in line with longer term objectives and in a pro-cyclical way.

Disclaimer:

This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to their objectives, financial situation and needs.

In this week’s investment article I take a closer look at Shane Oliver’s nine keys to successful investing.

Whilst I’m sure many of you have read or heard of some of these gems before, I think this is a timely reminder in times when debt is increasing and the gap between those that have and those that don’t widens.

These principles of investment carry through to all generations and apply equally to young adults entering the workforce, young families paying off a mortgage or those in retirement.

In many years of experience as an adviser, I have witnessed many very successful investors who have amassed large amounts of savings simply by starting off with as little as $100pm in a savings plan and building from there.

As they say, the most important step is just getting started. Once a disciplined savings pattern is established then regardless of the amounts, the power of compounding interest kicks in and over time a small initial sum can grow to a large nest egg. Superannuation is a great example of this strategy that largely relies on a combination of compound interest, regular ongoing contributions and time to achieve a good end result.

Young people are often put off by superannuation due to the inflexible long term nature of this savings vehicle. However, the inflexibility is generally the thing that determines that they will have sufficient set aside for a comfortable retirement. The recent early access to superannuation, whilst necessary for some is bound to have a significant impact on final super balances. Superannuation is simply one form of savings vehicle and whilst very tax effective I think a potentially smarter strategy combines super with other investment options that may be more flexible and cater better in periods of uncertainty like those we are currently facing. Very few people can say that they have a job for life regardless of external factors and therefore good planning and a diversified investment approach can take some of the short term risk away by allowing access to funds in tough times. I don’t believe that there is any one investment strategy that can guarantee success, rather a combination of strategies that utilises one or more of the nine keys highlighted in this article are less likely to fail. Some investors will only invest in shares, others in property and others prefer to stick to cash. Regardless of the choice of investment vehicle the principles ultimately remain the same. Step 5 which talks about “turning down the noise” is possible one of the biggest traps that new investors make. In the graphic illustration showing share market performance over days, months, years and decades we can see the impact that time can have. Here the share market risk or volatility is significantly higher over shorter time frames and yet often people will make short term decisions to buy or sell volatile assets like shares based on a positive or negative press release.

Finally point 9 talks about seeking advice. Those of us with perhaps a few more years of experience under the belt will know that you can’t be an expert in everything. Many people go to a gym and engage the services of a personal trainer, not because they don’t know how to use the equipment but rather to keep them accountable, on track to achieve their goals and importantly to avoid mistakes which could end up causing an injury. These days there is no end to the amount of information that can be gleaned off the internet, but if I’m sick I want to see a doctor or if I have a tax query I want to talk to an accountant. In the same way a good adviser should be able to help you achieve your goals as you pass through the many stages of life and importantly also help you to avoid some of traps and pitfalls that many investors fall into.

Disclaimer:

This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to their objectives, financial situation and needs.

Over recent weeks we have seen much discussion on the state of global and Australian share markets, and it’s not surprising to see the strong sell-off of technology stocks in recent days.  This week we thought that it would be timely to provide some commentary on the Australian property market.

Rod Cornish, Head of Real Estate Strategy at Macquarie Asset Management addressed this topic in a recent video.  For those of you interested, the video below provides an informative look at both the residential and commercial segments of the Australian property market and the impact that  COVID-19 has had.

For those that prefer an abridged summary of this, I have provided some short commentary below.

Key Australian property market drivers

There are three major drivers for the Australian property market:

  • Low interest rates;
  • Low unemployment; and
  • Strong net migration

In the lead up to this pandemic these three things were certainly helping to drive property market growth.  This was particularly so in the Sydney and Melbourne property markets where residential house prices had recovered sharply over the previous year.  Other major cities around Australia had not experienced the same growth, but nevertheless had not witnessed the sharp falls that some were predicting.

Pandemic impact on property prices

With the onset of the lock-downs and decrease in migration that occurred earlier this year we witnessed a sharp fall in both property listings along with a decline in house prices.  Investment properties took the brunt of these falls, especially inner-city apartment rentals that relied heavily on overseas students.

With an unemployment rate rising rapidly and expected to continue to rise well into 2021 it was not surprising that many commentators were predicting further sharp falls in residential house prices.  However, listings in some of the major cities, except for Victoria, are back to almost pre-COVID levels and some of the falls have not been as great as expected.

Similar to what we have seen in share markets, Government stimulus and initiatives like JobKeeper and the HomeBuilder scheme have played a major role. Other important factors are historically low mortgage rates and bank support by way of short-term mortgage relief which have all combined to keep prices relatively stable for now.

Where is the Australian property market heading?

Macquarie believes that the current decline in home prices of between 2-4% could increase up to around 10% off the back of higher unemployment and the withdrawal of Government support, however if this were to occur then they believe further Government initiatives to stimulate growth would be very likely.

Macquarie also believes that with interest rates predicted to stay low for at least the next 2-3 years, house prices are likely to bounce as employment and confidence returns. Although, medium to longer term growth rates are predicted to be much more subdued than in past decades.

On the commercial side, the increase in online shopping has seen a further demand for logistics and industrial properties and COVID-19 has further increased this demand.  In contrast, the retail sector has suffered badly and the growing trend for employees to work from home could easily see the demand for office space also reduce.

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If you’ve been wondering how to set up a family trust correctly, you are not alone. Thousands of new family trusts are set up in Australia each year for a variety of reasons including asset protection, tax optimisation or to act as the legal structure for a business.

How to set up a family trust in Australia

The following steps outline how to set up a family trust.  The exact structure of a family trust is best determined by seeking advice from both an accountant and lawyer who can explain everything and help determine what will work best for you and your family.

1. Choose the trustee

The most important decision when setting up a family trust is to ensure you select the correct trustee.  A trustee could be one person, a group of people or a company set up specifically to act as trustee.

A trustee of a family trust does not have to be a professional, it can be a family member or another trusted individual such as a close relative. The person (or persons) selected as trustee(s) need to be someone of integrity who can understand their trustee obligations such as acting in good faith. They need to be able to carry out their duty to act in the best interest of beneficiaries (not themselves).

Where a company is used, the company should be a newly set up company that ONLY acts as trustee of the trust. An existing company that is trustee of an SMSF or a company that operates a business should not be used. The director or directors of the trustee company should be selected with same criteria as above in regards to an individual trustee.

In most cases, the most suitable trustee structure for a family trust will be a newly incorporated proprietary company (Pty Ltd). One of more individuals will be appointed as directors of the trustee company.

A trustee company must issue shares – typically as little as $2 (hence the expression “$2 company” or “shell company”). Legal advice should be sort on who should only the shares in the trustee company, as the shareholders can vote the directors in and out of the company, and the company legally holds and controls the assets of the trust.

Ideally the shares in the corporate trustee of the trust should be held by a person who is ‘safe’ – i.e. not likely to go bankrupt and hand control of the trustee company to creditors who would then control the assets of the trust.

At this time its also important to consider who the ‘appointor’ of the family trust is.  An appointor (also sometimes called the principal) is defined as a person with the ultimate power of appoint and remove trustees.

The appointor of a trust is not involved in the day-to-day administration of a family trust as this power and control is given to the trustee(s) or trustee company and its directors. The succession of the appointor (i.e. what happens on their death) is also best determined at this early stage to ensure ultimate control of the trust passes smoothly to the next generation.

2. Draft the trust deed

Once the key decisions around selecting the trustee and appointor of the family trust is made, the next step is to engage a lawyer with expertise in trust law to create the trust deed.

Many accountants will provide family trust set up services, however they are not themselves drafting the trust deed, they outsource it to a legal document provider (i.e. they use a legal template).

Ideally a lawyer should be involved with overseeing the trust establishment structure with the assistance and advice of an accountant.  Quill Group can provide this service through our legal business Intello Legal.

3. Settle the trust

A key aspect of setting up a family trust is settlement. Settlement of a family trust involves an independent person unrelated to the beneficiaries transferring a settlement sum (typically $10) to the trustee.

There should be a physical transfer of the settlement sum from the settlor to the trustee and this amount should be the first deposit into the bank account when the family trust bank account is set up (refer Step 5 below).

The settlor must hand over the settlement sum to the trustee to be held on the terms of the trust (as per the trust deed) for the benefit of the beneficiaries.

The trustee must issue a receipt to record this has occurred. This is the point at which the trust is created because, by executing the trust deed and providing the settled sum:

  1. the settlor has put the trustee in charge of trust property;
  2. the settlor has defined for the trustee which persons fall within the class of beneficiaries, as stated in the trust deed; and
  3. the trustee has agreed to act.

The settlor then steps out of the picture.

From a legal perspective it is advisable to limit the settlor’s role in a trust to the initial establishment of the trust and payment of the settled sum. To avoid the perception that the settlor’s declaration of trust is revocable (i.e. they can make changes to the trust, beneficiaries or even close the trust down), the settlor should be unrelated to the trustee and the beneficiaries of the trust.

At this time the trustee(s) of the family trust (as determined in Step 1 above) sign the trust deed to accept the appointment of trustee(s) of he trust.  By signing the deed they agree to be bound by the rules contained within the trust deed.

4. Stamping of the trust deed

Whether a family trust deed needs to be stamped and pay stamp duty or not is dependent on the State or Territory the trust is established in.

The table below outlines the stamp duty payable for the stamping of a family trust in each State and Territory:

State / Territory
Stamping Instructions and Costs
NSWNeeds to be stamped by a registered OSR lodger within 3 months from date of execution. $500 ($10 per additional stamped copy).
VICNeeds to be stamped by a registered Duties Online Agent within 30 days from the date of execution. $200 (No charge for additional copies).
ACTStamping not required. Stamp duty is not payable.
QLDStamping not required. Stamp duty is not payable.
SAStamp duty is not payable, but deeds may still be stamped ‘exempt’.
WAStamping not required. Stamp duty is not payable.
NTStamping via NT Commission of Taxes within 60 days from the date of execution. $20 ($5 per additional copy).
TASStamping by SRO Tasmania within 90 days from the date of execution. $50 (no charge for additional copies).

5. Apply for the ABN and TFN

Once the family trust has been set up, the Australian Business Number (ABN) as well as the Tax File Number (TFN) need to be applied for.

These applications are completed online via the Australian Business Register (ABR)  and typically completed by an accountant.  If all correct details of the trustee and associated parties are provided, the ABN should be issued instantly with the TFN shortly after.

It can however take up to 28 days for the ABR to issue the ABN for a family trust if they need to undertake any manual checks of the details provided as part of the registration.

6. Set up trust bank account

We are often asked how to set up a trust account at a bank for a family trust. A bank account should be opened in the name of the trustee (e.g. Trustee Company Pty Ltd) as trustee for the family trust.

A bank will typically require the ABN and TFN for the trust as well as a copy or certified copy of the family trust deed.  In addition a bank or other institution may also want to see a copy of the constitution, ASIC extract or Certificate of Incorporation for the trustee company.

The settlement sum (as discussed in Step 3) should be the first deposit into the bank account of the trust.

An often overlooked aspect of setting up a family trust is choosing the correct bank account.  Trustees of a family trust need to ensure main bank account is fit for purpose.  They need to consider what it is going to be used for and who will need access.

For example will it be used to execute investment purchases, or is it going to be an transacting account for a business.  Does the bank account provide a data feed into the Trusts online accounting software like Xero?

Once the bank account is set up and active the family trust is officially operational and can received additional capital via borrowings (including loans from beneficiaries), purchase investments and operate a business.

Benefits of setting up a trust

Is it worthwhile setting up a family trust? Before setting up a family trust it’s important to understand the benefits and ensure it’s worthwhile for your family and your situation.

What is a family trust?

A family trust is also known as a discretionary trust. A trustee (either a person, group of people or a company) holds assets on behalf of beneficiaries. A trust deed is a formal legal document that names the parties (trustee(s) and beneficiaries) and contains the rules on how the trust should be operated.

Family trust structure

The following structure diagram illustrates the key parties and relationships in a family trust:

How To Set Up A Family Trust Structure Diagram 1024x870 1

Family trust definitions

TermDefinition

Trustee

The trustee of a family trust is the legal owner of trust assets and has control of the day to day operation of the trust including managing the assets. The trustee can be an individual, group of individuals or a company.

Trust Deed

A trust deed is a document that contains the rules of how the trust is to be operated (terms and conditions) as well as the relationships between the parties. A trust deed will name the trustee, settlor, beneficiaries and appointor (where applicable).

Appointor

The appointor of a family trust is also sometimes known as the principal and has ultimate control of the trust. An appointor is a person named in the trust deed who can change or remove the trustee of the trust.

Settlor

The settlor of a family trust creates the trust by providing the trustee with an asset or assets to be held for the benefit of the trust beneficiaries. The settlor should not be a beneficiary of the trust and should be unrelated to the beneficiaries. The role of the settlor is to provide property (the settlement sum) to the trustee, sign the trust deed and then have no further involvement in the trust.

Settlement Sum

The settlement sum is the initial trust property used to create the trust. A settlement sum is usually $10 which is held as cash by the trustee then deposited into the trust bank account (although it can be kept on hand or even stapled to the trust deed). A settlement sum can be different amounts or be other assets or property, however duty might be payable where the settlement sum is NOT cash.  It’s also possible to have multiple settlement sums.

Beneficiaries

Beneficiaries are the ‘real’ owners, or the persons or group of people or entities who benefit from the assets in the trust. Beneficiaries can be specifically named in the trust deed or be defined through the terms of the trust deed. The trustee decides on the income and capital of the trust to be distributed to the beneficiaries.

When to set up a family trust?

Deciding when to use a family trust can be tricky, however the following are examples of reasons for a family trust to be set up:

  • To hold a family business
  • To own family assets (including buying property in a trust name)
  • To protect family assets
  • To (legally) minimise tax by sharing income and capital gains across family members
  • Estate planning and management

Another important aspect is looking at how much does it cost to set up a family trust and comparing the set up and ongoing costs against the advantages of the trust.

Family trust advantages and disadvantages

Family Trust Advantages

Family Trust Disadvantages

Asset Protection:

When someone it at risk of bankruptcy their personal assets are at risk and can be seized by Court Order or judgement and made available to creditors.

When structured correctly (with appropriate legal advice) a trust may provide protection.  This requires the bankrupt individual not being the appointor or trustee and also if they’ve not used the trust with the intention of hiding assets from creditors.

Disputes:

Where a trust builds up a significant amount of assets and becomes and important vehicle holding a significant portion of a family’s wealth, the operation of the trust can become a challenge.

Control over the trust and the trusts assets becomes very important, as does succession if the appointor or trustee loses capacity of dies.

Gina Rinehart found this out in regards to her family trust.

Family Trust Tax Benefits:

When a family trust purchases investments (including shares, ETFs, managed funds, property or a business) the trust itself is entitled to the income.

The trustee then decides how the income and capital gains of the trust is to be distributed (given on paper) to the beneficiaries each tax year.

This enables the income from the investments and assets of the trust to be streamed through to beneficiaries in the most tax effective way.

Families need to be careful however if making distributions to minor beneficiaries under 18 as higher tax rates apply on trust distributions paid to minors.

Tax Losses:

When a trust makes a loss for tax purposes during the financial year that loss stays in the trust.

Tax losses typically cannot be distributed meaning the individual beneficiaries can’t use the losses from those investments to reduce their personal income and personal tax bill.

The losses are carried forward however and therefore can be applied in future financial years to reduce the taxable income that has to be distributed.

Passing Down Assets:

A trust is a useful way of legally moving assets from one generation to another without triggering capital gains and stamp duty.

Not Part of Estate:

The trustee of a trust is legally separate from the beneficiaries meaning assets held by a trustee do not become assets of the estate when a beneficiary dies.

However, if the trust owes money to a deceased beneficiary (beneficiary loan or unpaid present entitlement) the loan owed becomes an estate asset which could create issues for the trust if the loan has to be paid out.

Borrowing:

Banks will typically lend money to a family trust and there is no restriction on using the assets of the trust as security for a loan or mortgage.

Social Security:

Depending on the structure, Centrelink may deem a share of the assets or income of a family trust (private trust) as being controlled by an individual an therefore included those assets and income (or a percentage of them) as part of the means testing for the age pension.

Protection of Vulnerable Beneficiaries:

When structured correctly a family trust can be a great tool to protecting vulnerable beneficiaries who may make unwise spending decisions if they controlled assets in their own name.

For example, a child or grandchild who is not good with money or has other health or addiction issues.

Upfront and Ongoing Costs:

A family trust has both the upfront cost to set up the trust as well as ongoing costs to manage the trust including preparing the annual accounts, tax returns and family trust distribution minutes.

The amount of ongoing annual accounting fees for a family trust will vary depending on the complexity of assets in the trust as well as the level of service delivered by the accountant.

A trust with basic investment assets such as shares, managed funds or investment properties may cost under between $1,500 and $2,500 per year, whereas a larger and more complex trust with more assets may cost between $3,000 and $5,000 per year.

There are many variables that can impact ongoing accounting fees.

How much does it cost to set up a family trust?

Costs involved in setting up a family trust include:

  • Legal and taxation advice on the best structure including selection of the appointor, trustee, settlor and beneficiaries of family trust
  • Establishment of the corporate trustee for the family trust
  • Drafting of the trust deed
  • Attending to the meeting of the settlor and trustee(s) to settle the trust
  • Preparation and lodgement of the ABN and TFN applications with the ATO
  • Establishment of the family trust bank account

For example, as of July 2023 the costs for set up a family trust with a newly incorporated company trustee from Quill Group is $2,666*

*Includes $576 ASIC company incorporation fee.  Please note that ASIC indexes this fee and increases it each year on 1 July.

Please also note that the above fees are purely for the establishment of the family trust structure – it does not include any legal, accounting or taxation advice on the recommended structure of the family trust.

How much is needed to set up a family trust?

How much is needed to set up a family trust is dependent on the needs of the beneficiaries and the purpose of the family trust.

If the family trust is going to be operating a business, enough capital needs to be injected to commence trading of the business.

If the family trust is being used as an asset protection vehicle, it’s best to speak to a lawyer to help determine how the trust can be used to protect assets and provide guidance on the most cost-effective means or doing so.  The ongoing annual costs of keeping the family trust active and lodging tax returns might be a comparatively small amount for the peace of mind a correctly structured family trust may provide.

If the family trust is being set up to legally reduce tax payable on investment income and capital gains, an accountant can provide a strong recommendation based on estimated tax savings as well as asset protection in comparison to the annual ongoing fees.

The annual ongoing accounting, tax and ASIC fees relating to a family trust will be one of many factors in determining how much is needed to set up a family trust, but its not the only factor and competent legal and tax advice should be sought.

Frequently Asked Questions – FAQs

The following are some common questions relating to setting up a family trust.

Who can set up a family trust?

A lawyer with expertise in trust law is the best placed to legally set up a family trust. An accountant is prohibited from providing a legal service.  The majority of accountants who provide a family trust set up service to their clients are simply facilitating the establishment through a legal document provider who provides legal sign-off on the documents.

Accountants are very well placed to advice on the use of a family trust from a taxation perspective, however they may overlook important legal considerations – especially where there a complex or specific legal outcomes that are needed.

Quill Group in conjunction with our legal business Intello Legal are uniquely placed to provide comprehensive legal and taxation advice under the one roof.

How to set up a trust?

The following 6 steps can be used to set up a family trust:

  1. Choose the trusee
  2. Draft the trust deed
  3. Settle the trust
  4. Stamp the family trust deed
  5. Apply for the ABN & TFN
  6. Set up family trust bank account

Refer to above for the detailed steps.

How to set up a trust fund?

The term ‘trust fund’ is generally used in the United States and most people in Australia use the term ‘trust fund’ to describe a family trust / discretionary trust.  To set up a trust fund, refer above for the detailed steps.

It’s important not to confuse a trust fund with a self-managed super fund (which is also a type of trust!).  If you would like to set up a self-managed super fund, please visit our specialist SMSF business Intello Private.

How to set up a trust company?

A trust and company are two very difficult legal structures. You can set up a company or set up a trust – they are different.

A trust may (and in many cases should) have a company as the trustee as this provides longevity and administrative efficiency as control of a trust can be moved to different persons through transferring the shares (ownership) and directorship (operational control) to the new individual(s) who will control the trust.

Using a company as trustee of a family trust avoids the need to legally change the ownership and title of assets when control transfers, so there is no need to undertake title transfers of properties, close and re-open bank accounts in the name of the new trustee(s) or transfer shares or other investments to the new trustee(s).

Setting up a family trust to buy property (for buying property in a trust name)

Before setting up a family trust to buy property it’s important to seek both taxation and legal advice.

To set up a family trust to purchase property as an investment, please refer above for the detailed steps.

Land tax when buying property in a trust name

Advice should also be sought on the land tax implications of buying property in a trust name. From 1 July 2020, the land tax headlines across the country can be summarised as follows:

StateTax-free ThresholdTop ThresholdTop RateTrust Surcharge RegimeForeign Owner Land Tax Surcharge
ACTNil$2,000,0001.10%NoYes
NSW$734,000$4,488,0002.00%YesYes
NTThe Northern Territory does not currently impose land tax on property owners
QLD$600,000$10,000,0002.25%YesYes
SA$450,000$1,350,0002.40%YesNo
TAS$25,000$350,0001.50%NoNo
VIC$250,000$3,000,0002.25%YesYes
WA$300,000$11,000,0002.67%NoNo

States such as New South Wales, South Australia, Tasmania and Victoria have aggregation or grouping rules when it comes to property ownership which can increase the amount of land tax payable.

Typically, land held on trust has not been dragged into these grouping provisions. This is because determining who ultimately controls or benefits from a trust can, in practice, be very difficult. For this reason, NSW, Victoria and Queensland have introduced a surcharge regime to impose land tax on trusts at a higher rate.

StateTax-free threshold for land held on trustSurcharge Rate 
NSWNilRates are unchanged for trusts as the elimination of the tax-free threshold significantly increases the land tax burden on trustees
QLD$350,0000.5%
SA$25,0000.5% – Surcharge phases out such that the top rate does not exceed 2.4%
VIC$25,0000.375% – Surcharge phases out when the total value of the taxable land is between $1.8m and $3m. For land holdings valued over $3m, the surcharge rate is the same as the general rate.

There are also additional surcharges applicable in ACT, NSW, QLD and Victoria where there is a foreign owner of a property.

Land tax and family trusts is a complex area so it’s essential appropriate taxation and legal advice is sought before a family trust is set up to purchase property as an investment.

How long does it take to set up a family trust?

Provided all parties (i.e. trustees and settlor) are available and agreeable to set up the family trust, it’s a quick process to legally establish the trust. It’s possible to set up a family trust within 1-2 business days in normal circumstances which includes an allowance for taxation and legal advice to be sought.

Although there are online providers who will ‘instantly’ set up the trust, this is purely the provision of documents.  Trusts can be complex structures therefore it’s important to take a little time and seek advice prior to setting up a trust in Australia.

A trustee company can be registered instantly with ASIC provided the company registration fee is paid. The trust can be settled on the same day the trustee company is incorporated.  Once the trust is settled (through the settlor providing the settlement sum and the settlor and trustee(s) executing the trust deed) the trust is legally established and the trustee is able to enter into contracts and acquire assets on behalf of the trust.

It may still take up to 28 days for the ATO to issue an ABN and TFN for the newly established trust, and the trustee also needs to make the time to set up the bank account of the trust.

How to transfer assets into a trust Australia?

Although its possible to transfer existing assets such as shares, managed funds and property into a family trust, the major drawback is that the change of legal ownership will potentially trigger both capital gains tax as well as stamp duty.

There may be long-term income tax and asset protection advantages to transfer investments already owned into a family trust and these advantages may outweigh the upfront capital gains and stamp duty costs associated with the transfers.

Once again, transferring assets such as property into a family trust is a complex area. Legal and tax advice should be sought.

More questions?

Quill Group can assist you with both the initial set up of a family trust as well as the ongoing accounting and taxation work for your family trust.

In addition to taxation expertise Quill Group has in-house legal expertise in family trusts via Intello Legal.

Please get in touch with our team if you have any questions regarding the contents of this article or the services mentioned.2,

The argument between active vs passive investing strategies can be thought of like this: All of us think we are above average drivers. We have seen the other fools on the road and figured we would never make the same mistakes as them: turning with no indicator, driving at night with no lights on, going to slow, too fast – you get the picture.

When it comes to investment strategies we have the same tendency. We tend to feel our knowledge is above average. In order to figure out what ‘average’ is, investment market data providers created indexes.

Table of Contents

Index Investing: Vanguard Index Funds

Initially indexes were designed to simply keep track of overall stock market gains and losses for a given day, month or year. Then, in September 1976, Jack Bogle created the first of many low cost Vanguard index funds based on the Standard and Poors index of the 500 largest US companies (S&P 500). The rest as they say is history as Vanguard grew to become one of the largest money managers in the world.

What is Passive Investing?

Passive investing is a strategy that tracks a standard market cap weighted index or portfolio. Passive management typically achieved through index funds or exchange traded funds (ETF) and ignores the valuations or future prospects of any given company. As long as a company meets the index criteria, it is included as part of the passive investment portfolio.

Passive investing is based on the Efficient Market Hypothesis, which proposes that all the possible known information about a stock is always fully factored into the current stock price, therefore no amount of additional analysis can give the individual investor any significant ‘edge’.

Active vs Passive Investing

At the other end of the spectrum are those who believe that applying their skills of analysis they can avoid the overpriced companies and buy those that have better prospects, and in the long run beat those indexes. Active management refers to an investment strategy where the portfolio manager makes specific investments with the goal of outperforming an investment benchmark index.

I don’t plan to dig into the depths of the active versus passive investing argument in this article, however if you are interested, there is a recent active versus passive investing white paper available here.

There are many examples of active investment managers who have been able to beat their comparable benchmarks, or at least match the benchmarks with lower volatility, which is a big consideration for portfolio construction and an often overlooked aspect of the active vs passive investing debate.

Is Passive Investing Sustainable?

The point I want to focus on is sustainability – and I’m not talking about the growing number of sustainable exchange traded funds (ETFs)! The core generic question you’re asking is:

‘If everyone in the world did this (the thing you are contemplating), would the world be a better place or a worse place?”

I want to ask that question about passive investing strategies.

Passive index investing only works when there is a cohort of people still asking questions about the investment merits of each individual company that exists. To put it another way, passive investment strategies need active investors to be able to work.

When capital is allocated without asking those deep questions, entrenched companies would get all the new capital, and the new innovative companies would have no access to capital.

Active vs Passive Investing Trends

How much money has flowed into passive investments such as the Vanguard index funds in recent years?

The chart below shows the amount of money invested globally in exchange traded funds (ETFs – i.e. passively managed) versus global hedge funds (i.e. actively managed) between 2003 and 2019.

Active Vs Passive Investing Passive Etf Bubble 1

In 2015 the amount of money invested passively, or in other words by ‘price and value agnostic’ investors, exceeded the amount actively invested by those who want to make an objective assessment of the future prospects of the underlying business.

To the casual observer, it might seem like a win for passive investment management, and just an indicator that everyone is catching on to the idea of low cost index investing through vehicles like ETFs and Vanguard index funds.

But if those in the black bars represent drivers with their eyes closed (passive investing), then the diminishing number of blue bars representing those who are driving with their eyes open (active investing) means that there are fewer analysts looking at what is fair value for any individual company.

Passive ETF Investing Bubble?

With more and more capital flowing into passive versus active investments, the companies which are already the largest, are going to get the lions share of future inflows to the stock market as the passive investment vehicles purchase more and more of their shares.

Given that prospect, it is informative that the biggest five companies in the S&P 500 have been the ones that have driven most of the recent returns during the current 2020 calendar year to date:

2020-FB-AMZN-AAPL-MSFT-GOOGL-Returns-versus-SP500

With most active investment managers holding those names being somewhat reluctant to sell in the current market – where COVID-19 defensive stocks like Facebook, Amazon, Apple, Microsoft and Google are seen to be less susceptible to the downturn – they have been pushed up to valuation heights that make the typical ‘value’ manager airsick.

Active vs Passive Investing: Which is Better?

Now, just because we can see a potential problem with passive investing, it doesn’t mean the game is anywhere near the end. But it is important for investors to understand the new rules of this game.

Quantitative easing, central banks buying stocks in some countries (I’m looking at you Japan, and you Switzerland), and this dominance of flows into passive investment strategies; active investment managers with their spreadsheets and attention to the regulatory filings may be left in the dust.

At present, indiscriminate buying by passive investors is helping markets. One day the reverse may happen, and passive investment liquidations will also be indiscriminate.

We all hope to be above average drivers with our eyes wide open when that day comes.

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Definitions

The following are definitions to some of the more technical investment terms contained in this article for your reference:

Active Investing / Active Management

Active investing or active management is where the investment manager ‘picks stocks’ through buying and selling shares in specific companies with the goal of outperforming an investment benchmark index or target return.

Defensive Stocks / Defensive Investing

Defensive stocks are investments including shares in companies that provide consistent dividends and stable earnings that are typically not impacted by short-term stock market volatility.

Efficient Market Hypothesis

The efficient-market hypothesis is an investment theory that states that asset prices reflect all available information therefore it is impossible to “beat the market” consistently on a risk-adjusted basis since market prices should only react to new information.

ETF

Exchange-Traded Fund. An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur.

Hedge Fund

A hedge fund is an investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques to improve performance, such as short selling, leverage and derivatives. Similar in structure and operation to a mutual fund or managed fund.

Index

An index, stock index, or stock market index, is an unitised measurement of a stock market, or a subset / basket of the stock market, that helps investors compare current price levels with past prices to calculate overall market performance. It is computed from the prices of selected stocks that make up the index.  Examples of indexes include the S&P 500 and ASX 200.

Index Funds

An index fund is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments.

Index Investing

Index investing is the process of using index funds or ETFs to build a passive investment strategy. Index investors decide which markets they want to invest in, how much of their money to put in each one, and use index funds and exchange traded funds to put that plan in place.

Investment Strategy

An investment strategy is a set of rules, behaviors or procedures, designed to guide an investor’s selection of an investment portfolio.

In the context of an self-managed super fund (SMSF) an investment strategy is a document that must be reviewed regularly (at least annually) and must cover items such as diversification, risk, cash flow, liquidity and insurance.  SMSF Investment strategies have been a recent focus of the ATO.

Passive Investing

Passive management is an investing strategy that tracks a market-weighted index or portfolio. Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.

Quantitative Easing

Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity.

S&P 500

The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market

Value Investing

Value investing is an investment paradigm that involves buying securities that appear under-priced by some form of fundamental analysis. Also known as active investing, active management or ‘stock picking’

Vanguard Index Funds

Vanguard pioneered the concept of indexing, introducing the first retail index fund in the US in 1976. Some popular Vanguard index funds in Australia include: Vanguard Australian Shares Index ETF (VAS) and the Vanguard Diversified High Growth Index ETF (VDHG) which is popular with devotees of the F.I.R.E. investment and lifestyle philosophy (Financial Independence / Retire Early)

Weighted Index

A weighted index is a stock market index whose components are weighted according to the total market value of their outstanding shares.

This roundup has been provided by Christopher Lioutas who is Director of Insight Investment Consultants. Chris is a member of the Quill Group Investment Committee as an external consultant.

Economic Update

The value of Australian retail trade rose strongly in March, surging by 8.5%, which was the strongest monthly rise on record. Spending on food and household goods was incredibly strong, with eating out, clothing, and department stores incredibly weak. The problem is in the rush to hoard and work from home, we got gouged: Retail trade volumes are only marginally positive, so we paid a lot more for the same goods we always buy under the guise of limited supply.

The Australian unemployment rate rose to 6.2%, coming in much better than expectations. The problem is the headline number doesn’t come close to telling the real state of affairs. The participation rate (those in work and those actively looking for work) fell through the floor as almost 500,000 left the labour force, thus masking a much higher unemployment number, which would’ve been above 9% had the pre-virus participation rate been used.

Around 1 in 5 employed people have either left employment or had their hours reduced, with the underemployment rate rising almost 5% to 13.7%.  Absent JobKeeper and JobSeeker, the numbers would be even worse (circa 15% plus unemployment).

The RBA is forecasting a sharp drop in economic growth this year before a rather sharp rebound in ’21 and ’22. The sharp rebound is anyone’s guess right now. They also have inflation remaining low and below target out to ’22 which means we won’t see any upward pressure on rates until at least 2023. Lastly, they are forecasting a sharp rising in unemployment to 10% this year, with falls back down to 6.5% in 2022. The unemployment rate was 5.2% pre-virus.

US jobs data continues to worsen with more than 36 million now having filled claims for unemployment benefits. The unemployment rate rose to almost 15% and that was with the participation rate falling, which means the unemployment rate is much worse than the 15% suggests. Analysis shows that 40% of households earning less than $40,000 a year lost a job in March.

The US central bank chairman Jerome Powell has maintained that negative interest rates aren’t being considered. This is in stark contrast to market pricing which is implying that the bank will cut rates to below zero next year. The Australian central bank chair has also maintained that negative rates aren’t being considered, but chairs are in a position to rule anything out right now.

Chinese data showed a sharp drop in their factory prices, which was to be expected. Whilst factories are back almost full capacity, limited to no demand from the West (given we’re still in lockdown) will result in massive amounts of supply unless factory output is curbed. Problems for China.

Political Update

Anti-China rhetoric ramped up geo-political risks this week, with China threatening, and in some cases carrying through, with the threats to boycott Australian barley and meat. Education could be next.

US President Trump ramped up his anti-China rhetoric by asking the federal pension fund to exclude Chinese equities from its holdings and pushing the securities regulator to look at banning and potentially removing Chinese listings on US stock exchanges. Whilst abandoning the phase 1 trade deal looks unlikely, President Trump has asked for ways to raise tariffs without breaking promises in the trade 1 deal. He may also be looking at strict enforcement of the phase 1 deal which would be significantly difficult for China to meet without hurting their economy.

In contrast, China is opening up its financial markets further to foreign investors and trade talks between US and Chinese officials have begun and look relatively healthy at this point. China might be playing hardball on the anti-China front, but they will need to significantly open their economy and their financial markets ahead if they are to prosper and meet their targets.

Countries that have begun to re-open have reported an increase in new Covid-19 infections. This is to be expected. The virus can’t and won’t disappear. Even a vaccine won’t assist as vaccines aren’t mandatory and vaccine safety takes considerable time to achieve. The actions of governments are now even more critical – ie. if they stall the re-opening, or go back to lockdown, no amount of stimulus will stop the economic carnage that will take place.

Summary

What does all this mean for investors?  Our views have not changed at this time: Stay invested, expect some short-term volatility, but be cautiously optimistic and focus on the long-term.

If you have any questions or would like further information, please contact your relationship manager.

You can view more of our market updates here.

Introduction

In the last few weeks we have certainly seen more stability return to investment markets along with many countries, including Australia, talking about a return to work and some easing of restrictions which have plagued investment markets over the last three months.

In some recent communications we discussed the “Light at the end of the Coronavirus tunnel” and then the sharp rise in the ASX200 during the month of April.

However, in our view there is certainly still the need to remain cautious despite this recent optimism. 

In Europe and in particular the UK we are still not seeing a significant drop in Coronavirus cases.  In some cases we are also seeing a so called “second wave” of cases appear and therefore whilst everyone would like to see a return to normality as soon as possible, it could still be some time off.

Likelihood of a recession in Australia

Markets have almost certainly already priced in the expectation of a recession, in the USA, Australia and most other countries.  Nevertheless, the question still remains as to how bad and how long a recession will last?

The answer will most likely depend on the availability of new antiviral drugs and ultimately a vaccine. In the mean time it is most likely we will continue to see small improvements on the path to recovery and likewise in some sectors of the market we will see V-shaped recovery whilst in others it will be a slower U-shaped recovery.

What investors need to focus on

Given these market conditions are so unusual, in that they are completely dependent on a health crisis, what can investors do?

During volatile periods like we are experiencing,  investors can sometimes make sub-optimal decisions when emotions take over, tending to buy out of excitement when the market is going up and sell out of fear when the market is falling. Markets do ultimately normalise, and when they do, those who stay invested may benefit more than those who don’t.

Therefore for those already invested the message is to stay invested and try limit the draw-down of capital so that when market conditions improve you are best placed to participate in that growth.

For those looking to invest, the strategy of “dollar cost averaging” is worthwhile considering. This is where the amount you are looking to invest is divided into smaller parcels and invested over a period of time rather than all at once.

Disclaimer

This article contains general information only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Before acting on any information in this report, you should seek financial advice taking into consideration your own personal objectives, financial situation and needs.

The debate over active versus passive investing has raged since the 1960’s and 1970’s when Jack Treynor and Bill Sharpe developed the Capital Asset Pricing Model. That work was the foundation for Eugene Fama and Kenneth French who developed the basis of the Efficient Markets Hypothesis.

The Efficient Markets Hypothesis

The Efficient Markets Hypothesis basically says that all information (about a stock) is continuously and instantaneously embedded into the price of securities at any given time. This theory implies that all humans are perfectly logical and rational decision makers. By extension then, no-one can outperform the whole sharemarket because all that can be known about a stock is already in the price.

As a result, one could surmise that the academic approach is to simply own all securities in the market at the ratio of their current market value over the total market. This method is called indexing. To be more specific, ‘Cap Weighted Indexing’ with the ‘Cap’ being shorthand for ‘Market Capitalisation’. For example, this week the market value of all the shares in CBA was $126.3 billion. At that price the company makes up 7.27% of the value of all the companies in the ASX200 index.

So, a cap weighted index investor would be putting 7.27% of his or her investment into CBA. The tenth largest stock in the ASX200 is Woolworths, with a market capitalisation of $37 billion, so it would only get 2.1% of your money.

Cap weighted indexing provides very broad diversification, and according to academia, that is a good thing!

But stepping outside of academia, what do the world’s greatest investors have to say on diversification?

Peter Lynch, in his book, One up on Wall St, he coined the phrase diworsification to make the point that making more investments into substandard opportunities, only for the sake of ‘diversification’ would likely make you worse off. This was the advice from a man who made 29% per annum from 1977 to 1990 for the Fidelity Magellan fund.

Another name that needs no introduction is Warren Buffett. His view is “diversification is protection against ignorance. It makes little sense if you know what you are doing.” He was effectively saying the same thing as Peter Lynch.

However, even Warren Buffett gave indexing a thumbs up in 2014 when he said he would instruct his widow to put the money she inherits at a 90/10 ratio into S&P500 index funds and bonds.  In my way of thinking the advice is coloured by two important factors. 1. with the amount she will have, even a 40% decline in values won’t leave her starving, and 2. he is very conscious that consistent out performance of an index becomes very difficult when you are managing $290,000,000,000 as he and Charlie Munger are at Berkshire Hathaway.

From 1965 till 2017, Berkshire Hathaway shares have grown at 20.8% per annum, over which time the S&P 500 grew at 9.7% per annum.  Clearly smart investors can outperform the market.

But let’s revert to the active vs passive question, and ask, ‘what are the characteristics of a portfolio manager that can outperform?’

For that answer we rely on two studies. Affiliated Managers Group is a company that buys into active funds management businesses. They are very incentivised to know what makes a market beating manager. In their 2014 white paper, “The Boutique Premium” they categorised ‘boutique fund managers’ as managers where the people making the portfolio decisions own at least 10% of the company, they manage less than $100 billion, and investment management is the sole business line.

They found that in the well researched asset universes, such as large cap US stocks, only around 50% of the boutiques outperformed the index. So it is basically a coin toss as to whether your ‘boutique’ manager will outperform the large well researched and hence ‘efficient’ markets like the S&P 500. But even in that market, the top 10% (decile) of fund managers outperformed by more than 6% per annum after fees.

What was of more interest was that in the global shares, smaller companies, and emerging markets, boutique managers had an excellent track record of outperformance. In both emerging market and small companies, these boutique managers outperformed by more than 2.5% per annum on average. The top decile managers in those markets outperformed by more than 11% per annum.

Macquarie Investment Management drilled into this argument from a different angle, comparing those managers who run a ‘Core’ portfolio and those who run a ‘Concentrated’ portfolio.

The mandate of the ‘Core’ manager is to provide an index plus return with a medium risk profile. Typically this group would hold 50-120 stocks with a target tracking error of between 0.50 – 3.0%.

Tracking error means the percentage return above or below a benchmark. For example, if Fund X made 10.50% return for a year, and the index they were using as a benchmark returned 9.5%, then their ‘tracking error’ was 1.00%.  As a perverse outcome, if that fund made 14.00% return, and the targeted ‘tracking error’ was 3.00%, then the manager might have some explaining to do, since the outperformance was above the targeted tracking error.

The second group that MIM tracked were those with a ‘Concentrated’ portfolio. These had an aim to deliver significant excess returns with a higher risk profile. They would typically hold 20-30 stocks with tracking error which could exceed 4.0%.

Here are their results.

 Concentrated excess over indexCore excess over index
1 year0.52%-1.58%
3 years (p.a.)1.47%0.09%
5 years (p.a.)1.67%0.13%

Source: MIM.  As at 31 December 2016

MIM also analysed the range of potential outcomes for an investor that allocated $100k to both a portfolio of Core and Concentrated managers over 10 years. The outcomes for investors allocating to top performing, median and poorly performing portfolios can be seen in the table below:

 

Concentrated

20 to 30 stocks

Core

50-120 stocks

S&P/ASX 300 Index
5th percentile (worst)$214,196$212,955 
50th percentile (average)$242,852$221,235$227,470
95th percentile (best)$285,472$236,830 

Source: MIM. As at 31 December 2016

What is evident from the above is that:

  1. the median Concentrated portfolio outperformed the index over the period
  2. the median Core portfolio did not outperform the index over the period
  3. the best performing Concentrated portfolios delivered significantly better returns than both the Core portfolios and index

What is the final lesson for us for diversification? 

We continue to strive for excellence. At times, and in some markets, cap weighted indexing may make sense.  But if risk budgets can be structured to allow for a little bit more tracking error, then additional returns can be achieved.

Part of our role at Quill Group Financial Planners is to research and recommend managers who have proven that they can outperform. The second part of our work is to monitor such managers and look for any signs that their ability to outperform (their ‘alpha edge’) may be diminishing.

If you aspire to have better than average performance, let’s talk about who is best placed to manage your money. Of course investing in this manner doesn’t guarantee outperformance, but we know it can be achieved, and for that reason we never give up the search.

So the changes to superannuation have meant that you are restricted with how much you can contribute and you ask, “What are tax effective investment structures when super is maxed out?”.

Good question.

With superannuation becoming difficult for people to contribute large amounts in a tax effective manner, where to place these funds outside of superannuation is becoming much more important. Everyone’s situation is different and will lend themselves to some options more than others, but there are still some incredibly effective options for most people to build wealth outside of superannuation.

We will look at some of these below and how they can be of benefit in managing the level of tax that is paid.

 

Tax effective investment structures when super is maxed out: Private Companies

For those tax payers whose incomes is taxed at a marginal tax rate of 30% or more, investing funds through a private company gives the ability to limit tax to 30% on earnings until those funds are withdrawn from the company. The tax rate may be even less if the company meets the definition of a Base Rate Entity (BRE). To be a BRE the company must be operating a business and have turnover less than $25m (for the 2017/18 financial year.

The drawbacks of companies are the added costs that are incurred each year through ASIC fees, and annual compliance costs to prepare tax returns and financial statements. Companies also miss out on the 50% CGT discount on capital gains, which does make them unattractive to invest in growth assets, although this may not be as bad as it seems. Companies are able to access the small business CGT concessions if the conditions are met.

As mentioned above companies only offer the ability to defer tax that is paid on the profits derived, as when these funds are withdrawn by the shareholders they must get taxed at their marginal rates at the time. Depending on circumstances, this deferral of tax could mean the final tax paid by the shareholder is significantly less than otherwise would have been paid. Due to imputation, the shareholder receives a tax credit for the tax paid by the company, so you may even receive an additional refund of these!

 

 

Tax effective investment structures when super is maxed out: Trusts

Family trusts offer an attractive investment vehicle, especially for growth assets as capital gains made in trusts may be able to access all of the CGT discounts and concessions. Family trusts require the profits to be paid out each financial year though (or they’re taxed at the highest marginal tax rate), so depending on where these profits can be distributed among beneficiaries decides the level of tax that is paid. Family trusts give you the choice each year on where the profits go, so give great flexibility to be able to achieve the best tax outcome possible in the circumstances available.

Unit trusts offer the same advantage as family trusts in that capital gains may be able to access the CGT discounts and concessions, but they are limited to where the profits must be distributed each year by who the unit holders are. They’re a little less flexible and have other tax consequences that may occur, so careful consideration needs to be made as to the situations in which they are used.

How to set up a family trust

If you’ve been wondering how to set up a family trust correctly, you are not alone. Thousands of new family trusts are set up in Australia each year for a variety of reasons including asset protection, tax optimisation or to act as the legal structure for a business.

The following article from Christina Wolfsbauer of Intello Legal provide a step-by-step guide to setting up a family trust.

How to Set Up a Family Trust

 

 

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Tax effective investment structures when super is maxed out: Investment Bonds

Investment Bonds, also known as insurance bonds and a few other names, are tax paid investments. They allow you to invest a lump sum where the earnings are reinvested and taxed within the fund at the company tax rate of 30%. After 10 years it is then possible to withdraw the funds with no additional tax paid. Funds are able to be withdrawn at any time, but if withdrawn before 10 years there are tax implications, with a sliding scale of how these are taxed. A tax offset of 30% (much like imputation credits with private companies) is applied to the taxable amount of any funds withdrawn.

Investment bonds also allow for additional contributions to be made each year without affecting the 10 year time frame but are limited to 125% of the previous year’s contributions.

Investment bonds are also an effective way to transfer wealth to the nominated beneficiary of the account, as upon death the beneficiary receives these funds tax free. This is the case even if the 10 years hasn’t passed.

As you can see there are still various options available to accumulate wealth outside of superannuation that offer flexibility and access to funds when needed. As each persons situation is different and may involve one or a combination of the above, it is always best to seek professional advice before establishing your future investment plan.

 

A common concern amongst investors arises when the value of their portfolio suddenly falls due to market volatility. Understanding market volatility becomes especially relevant for those who are close to retirement, or recently retired.

Typically, listed shares drive much of this volatility, and portfolios with larger allocations to shares are most affected. In times like these, it’s important to understand the causes of market movements and how to minimise your risk.

Understanding Market Volatility | Why do markets move so much?

Whenever there is significant uncertainty about the future, or a sudden and unexpected economic, financial, or political event, financial markets may experience volatility until the repercussions are more fully understood.

For example, consumer and business confidence affect spending and therefore company profits. Global trade and production naturally affect economic growth. Political and fiscal decisions in larger economies such as the US can have far reaching consequences globally. And of course, natural disasters can cause major damage to any economy without warning.

Is market volatility normal?

It is important to remember that markets move in cycles, and volatility is a natural part of the economic cycle.

The Australian Securities & Investments Commission (ASIC) agrees that, ‘negative returns from time to time are not inconsistent with successful long-term investment’. History demonstrates that over the long term, the general trend of share markets has been upward.

The question therefore is not if it will happen, but how to best plan for when it does happen.

Look at the bigger picture and have a Plan

1. Develop a long-term investment strategy and stick to it. A sound investment strategy to address your spending priorities will consider how much to invest, how long to invest for, and what return is required. Your financial adviser can help you to formulate a well-considered strategy. This will need regular review to ensure it continues to meet your needs and objectives.

2. Understand how much risk you are willing to accept. If market volatility has caused you to reassess the way you feel about risk, it’s important that you see your financial adviser to discuss any necessary changes to your financial plan.

3. Your investment may benefit by being spread across a variety of asset classes, including shares (domestic and global), fixed income, cash, direct and listed property and alternatives. This diversification should help soften the effects of any share market falls as some asset classes often tend to do well whilst others are struggling.

4. Take the emotion out of decisions. When your portfolio value suddenly falls, it may be tempting to temporarily or permanently withdraw your remaining funds. This creates a number of difficulties:

– Looking to re-enter the market by buying back later is a risky strategy that rarely results in investors coming out ahead.
– Crystallising losses. If the value of your investment is falling, you are technically only making a loss on paper. A rise in prices could soon return your investment to profit without you doing anything. Selling your investment makes any losses real and irreversible.
– Incurring capital gains tax (CGT). Make sure you know what your CGT position will be before selling any asset.
– Losing the benefits of compounding. If you’re thinking about making a partial withdrawal from an investment, remember that it’s not just the withdrawal you lose, but all future earnings and interest on that amount.

Need advice?

Your financial adviser can provide the guidance you need to put in place a well-rounded investment strategy designed to meet your needs.

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