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In whose name and in what?

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Putting together different investments so they work together can be like trying to construct the Taj Mahal using LEGO.

If you don’t know much about LEGO, you’re in for a world of pain.

The same can be said of investing. That excitement which comes from your first investment can quickly turn to sadness when there’s a negative value (like $-1,750). Tears or anger may follow an unexpected tax bill, and on it goes.

To smooth out your investment journey, it’s a good idea to check off a few items before you start or re-invest.

Ownership options

The main options are:

  • Directly in your own name or jointly with someone like your partner (ie name of bank account: Mr & Mrs Jones)
  • Held on your behalf using a:
      • Managed unit trust or insurance bond
      • Super fund
      • Company or a trust
  • Some or all of the above

You’ve probably got ‘some or all of the above’ if you’re an employee for example. Your employer puts your pay into a bank account (which is probably in your own name) and some into a super fund (perhaps called something like ABC’s My Super Fund).

The decisions about which ownership option suits best are based on your own personal circumstances, affected by things like your need to access the money, control and flexibility.

Each option, or structure, you choose may create different outcomes like an increased tax bill or a bad estate plan (when the person you loved least gets everything when you die).

If you find it overwhelming to make that many decisions about each investment you should get advice from a specialist (tax and legal).

In who's name?

Holding an investment in the name of a lower income earning partner (if you have one) is a good way to lower your combined tax bill. This is because the lower the tax rate imposed on the income earned from the investment, the higher the overall return will be.

But this isn’t always the case. It can depend on things like the investment, if you’re returning to work soon and whether you have a long term partner.

Using investment vehicles like a trust or company can sometimes offer tax benefits.

In your own name

If you earn money from investments, you’ll usually pay tax on that money.

You may be able to reduce the amount of tax you pay if you’re able to claim any tax deductions or tax offsets (also called rebates).

Investing in your own name can have benefits, but it depends on things like the investment and what your personal tax rate is.

For example, savings accounts, term deposits, managed funds, direct shares and property can be held in your own name taxed at your personal rate, or jointly.

Investments held jointly mean you’ll share the earnings, tax liability and any debt - so only own an investment with someone you trust completely.

Tax effective investments

An investment is tax effective if you end up paying less tax than you would have paid on another investment with the same return and risk.

The concept is usually applied to shares, property and super. We’ve provided some examples to show you how.

Super

Let's take Nathan for example, who earns $45,000 per year.

He’ll pay tax on 32.5 cents on each dollar he earns above the tax free threshold (currently $18,200) because his income falls within the $37,001 to $80,000 tax bracket.

If Nathan can invest so the tax he pays on the investment returns is less than his personal tax rate, then he’s ahead.

If Nathan puts money in super, he’ll pay a maximum of 15% tax on investment earnings. This is less than his personal tax rate, so super is 'tax effective' for him.

Shares

Shares which pay franked dividends are also said to be tax effective.

Franked dividends may be paid by Australian companies from after profits. You’ll get a credit for the 30% company tax already paid, called an imputation or franking credit. This means that a $7 franked dividend is worth the same as a $10 unfranked dividend.

Franked dividends are tax effective investments because the tax you pay on them is reduced by the amount of tax the company has already paid. If your personal tax rate is less than 30% you can have the excess franking credits refunded to you.

For more about shares read our article Should I be investing in shares.

You should note that while lower tax can help your savings grow faster, you should never base an investment decision on tax benefits alone. See ASICs make tax work for you for more information.

The tax office provides help with capital gains tax but you’ll need specialist tax advice if you can’t manage on your own.

Peace at death

If you die unexpectedly, an investment in your name should pass into your estate. Put simply, your 'estate' is like a temporary garage in which all you own and owe are dumped until a new owner is found.

What happens from there depends on whether you have a Will. More details about preparing an estate plan are available at ASIC MoneySmart.

To minimise potential conflict and, or tax over what’s in your estate:

  • Have a strategy for your estate and discuss this with a legal specialist (especially if its complex, involving several investments).
  • Think about who’s the best beneficiary of your estate when buying assets, as this may impact on who should own the investment (existing or new).
  • Keep your super death benefit nominations updated.

Possible bankruptcy

If you’re in an occupation that could be sued (eg lawyer, surgeon or property developer) and, or there’s a possibility you may become bankrupt, holding investments in your name isn’t usually a good idea but you’ll need to discuss the issues and options with a legal specialist.

Make sure you also discuss your super as well because its’ potentially up for grabs.

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