In the ideal world all investment decisions will result in equal returns for all investors, sadly this is not the case and most investors are oblivious to the fact that the manner in which they structure their investments can have a major impact and outcome in their fortunes.
We do not have the proverbial crystal ball and further we are not stockbrokers, analysts or investment specialists or advisers. The purpose of this article is to highlight a number of options that are available to investors to secure and turbo boost their investments.
In order to demonstrate this we will pit 2 investors against each other in an investment race.
In the blue corner we have Mr. Crowd an investor who is invests in his personal capacity and in the red corner we have Mr. Sharp an investor who invests through various bespoke structures.
Our point of departure is to firstly assess risk. We all believe that we are infallible but unfortunately we are all exposed to various vagaries and risks that could befall us such as a claim by a creditor a business or marriage failure etc. the first port of call is to avoid exposing your investments because your return on investment will be ZERO if it is lost due to a claim.
The risk other than the vicissitudes of the markets or the economy can be mitigated by correctly structuring the investment.
So forewarned is to be forearmed!!!
Now to the race…
Mr. Crowd does reasonably well and has R 100 000.00 to invest and does so in his individual name. He invests in shares and has a long term and a dividend yield strategy. Each year his carefully selected stock pays a handsome dividend.
Due to the shares being held in his name the Company that declares the dividend must withhold the dividend tax. This results in 20% of the dividend being decimated due to the tax. E.g if a dividend of R1.00 per share is being paid then Mr. Crowd will only receive 80 cents. He will then re-invest this but has effectively “lost” 20% of the dividend return.
On the other hand Mr. Sharp has established a Trust owned Company. Mr. Sharp invests the R100 000.00 into the Company (note must be correctly undertaken to avoid tax anti-avoidance measures). The Company in turn invests into exactly the same stocks as Mr. Crowd. Which pays exactly the same handsome dividend.
Due to the shares being held in a Company when the Company declares the dividend the declaring Company does not have to withhold the dividends tax as South African resident companies are exempt from dividends tax. As a result Mr. Sharp via his structure has secured an extra 20% on the dividend return. The Company will then re-invest the dividend but is 20% ahead of Mr. Crowd.
If one takes into account the compounding effect over a period of years the returns will be staggeringly different.
This option is relatively simple but it requires specialist advice to correctly navigate the Companies and Income Tax Act to achieve the desired result.
So are you Mr. Crowd or do you want to be Mr. Sharp?