Why ownership matters when it comes to investing

I work with a lot of clients who have just started their investing journey.

Usually they have put $5k or $10k into shares but haven’t been confident enough to put more in.

Whilst their initial plan was to ‘wait and see how it goes’, they realise that getting advice from a professional can shortcut this (very lengthy) learning period.

One of the first things we look at when it comes to investing is who owns the investment.

What does it mean to own an investment?

When determining who ‘owns’ an investment, your primary concern is tax.

For example, let’s say you put the investment in the lower earner’s name in a couple. This doesn’t mean that if you split up, that person gets to keep the investment because they own it.

In this instance, the rules associated with any divorce/separation would apply regardless of whose name the investment is under.

Instead, this means that the lower earner pays the tax on the investment.

What are the options?

Too often I see people set up their investments in the name of the person who is most interested. Commonly this is the higher earner, incurring a lot more tax.

Whilst there are many options, the main ones we consider are:

• One person’s name
• Joint names
• In a family trust
• In a company

Whilst a lot of people are keen to invest under their children’s names, they pay a prohibitive amount of tax which usually makes this not a good option. If you do want to invest for your children, there are ways to do this on trust for them but this is outside the scope of this blog.

So let’s get into the options.

One Person’s name

This is a great option where one person in the couple earns less than the other and will continue to do so all through the intended investment period including when you intend to sell off and draw down on the investment.

Please note that this relates only to investments where you anticipate earning a profit each year from the investment. Where this might not work is for an investment property where you want to offset the loss against the higher earner’s income.

Joint names

This is another simple option where the profits or losses are distributed evenly.

Most investment properties tend to be set up this way as you require both partners to secure the loan.

I’ve seen people who have bought investment properties in the higher earning person’s name as they received a greater negative gearing benefit. This has come back to bite them when the property became positively geared and they started paying a lot more tax than they need to.

Joint names is great where both members in a couple are in a similar tax bracket and will remain so.

It can also be a good option where one person earns more, but it’s expected the bulk of the income will be generated on sale where both parties aren’t working. This allows them to split the tax evenly.

Family Trust

A family trust can be a great option where you anticipate different incomes throughout the ownership period.

Essentially a family trust allows you to distribute the profits each year based on how much each person earns giving you a lot of flexibility.

This can also be helpful where one person earns more at the start but you both intend to retire at the same time and live on the money.

The biggest disadvantage of a family trust is that they are costly to set up and you need to lodge tax returns each year. Usually I won’t recommend a family trust unless you have a very large amount to invest.

From an investment property perspective, family trusts are usually not a great option. This is because you can’t offset any losses against your personal income when the property is owned by a trust.

Company

In Australia, companies pay a tax rate between 25% to 30% which is substantially less than high income earners. Because of this, companies can also be good investment structures.

These are most commonly used when the client is a business owner and has established a ‘bucket company’ to retain excess profits.

The big downside of investing through a company structure is you aren’t entitled to a CGT discount if you hold the asset for more than 12 months (which you are when investing personally or through a trust). For this reason, the more common method when money is held in a bucket company is to establish a loan arrangement to allow the company to loan the money to the business owner.

Other Options

Superannuation is another great investment option which is outside the scope of this blog. Regularly I see people treat super like it’s some sort of special investment different from their existing investments but it really isn’t.

Superannuation is just an ownership structure.

Summary

Whilst the above isn’t a comprehensive analysis, it does give you an idea of the possibilities that exist when it comes to investment ownership structure.

If you find yourself setting up an investment account and you haven’t considered these, then perhaps reach out. Getting it right in the first place can make a big difference down the line.