Big CGT event - distribute to individuals or to bucket company?

TL;DR - is it worth considering distributing money to a bucket company (30% tax) versus distributing to individuals with CGT discount (~22.5% tax)?

Detail:

Long time lurker and first time poster. I have read with interest bucket company discussion on this forum and was hoping some people could provide a sniff test for the following. The detail is deliberately vague for the purposes of privacy so I understand that any comments would have to be vague as well. Primarily this is intended as check to see if anybody has an immediate points that would forestall me having to do any more research/analysis. I am not a tax/accounting person by profession.

My family trust has realised a substantial capital gain event this FY (the amount is larger than the $2M discussed in [A]) and we are deciding how much (if any) to distribute to a bucket company where it would be taxed at 30%, versus taking it all as individual income where it would be taxed at ~23.5% (47% tax bracket and 50% CGT discount - in reality maybe a little less due to distribution and tax etc).

We have received conflicting professional (and personal) advice about whether this should be done. The more I read on this forum about cowboy accountants (particularly in relation to bucket companies/div7) a the more worrying it sounds.

The intention is to gradually pay it out via franked dividend to family individuals at points in time when other income is low, effectively using lower tax brackets and franking rebates to realise a lower effective tax rate (so [C] and [D]) . My calculations suggest that assuming no other income, $20,000-$50,000 fully ranked dividend payouts equate to an approximatelly 5.5% - 20% effective tax rate (roughly linear across the range).

The company would be used as an re-investment vehicle during this time also. My family has no need or desire for this money for current day-to-day living and our financial situation is such that we have a comfortable amount of debt-less assets outside of this event. But of course, this may change. The thinking primarily is currently around maximising the benefits towards retirement for the adults in the family (retirement is on the cards, but not solid plans)

I am viewing this as a question of whether the possibility of realising an effective taxation rate that is better than 23.5% is worth the headache of having the money tied up in a bucket company. The risks here seem numerous - financial rules may change (e.g. [.B] or shifting tax brackets, tax offsets) or our personal circumstances/preferences will change (buy a holiday home etc). The options in [C] provide some possibilities but are much more limiting than not having the money in a bucket company in the first place.

The administrative burden of having a bucket company is a sunk cost as one is already in place (historically operating at a much smaller scale)

My next course of action was to (a) dive deeper into understanding Div7A restrictions (which is not very appealing), (b) think deeper about what our family may want in the future, (c) try to better understand the future consequences of having to invest via bucket company and (d) consider the intersection of all of the above.

Before I do that I just wanted to sanity check whether even considering a bucket company option was sensible. If this was not so much a question of 'it depends on the detail' and more a 'this is outright crazy' (maybe because of obvious things I have missed) then at least I don't have to spend any more time researching and doing calculations for this.

Thank you for your time.

[A] Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors?
[.B] Franking credits - gone?
[C] Tax Tip 111: Getting money out of a Bucket Company
[D] Tax Tip 108: Using Bucket Companies to Save Tax

 

It certainly is worth considering because a company's tax is not the final tax. I have written a tax tip on this which I haven't posted yet.

 

An additional question then would be if it is appropriate to distribute to a bucket company then whether it should be this company or another.

 

If you use a bucket company you will eventually have to put the cash into the bucket company to enjoy a long term deferral.

Short and medium term loans are ok if you have liquidity problems. But if you don’t intend to put assets into the bucket company you can end up with a spaghetti monster that doesn’t really generate a net benefit.

Sometimes the bucket company also generates business income and enjoys a lower tax rate.

Get the bucket company owned by a different trust. The ato are looking at these in detail - some use a “washing machine” arrangement and it is fraught with danger.

 

Generally capital profits from trusts go to individuals to get the cgt discount - not always but mostly.

 

Efficient tax planning of distributions should already have compared and made you aware of the benefit of streaming (if the trust is able) CGT amounts to a individuual rather than a corporate beneficiary. Many older trusts may also need to consider if they can amend and that would invole a one-of legal cost. The tax rate is a maximum 24.5% inc; medicare v 30% for a company. Each $100K of total gain potentially will save $5500.

Other effects can mean Div 293 tax applies to the individual so all their concessional super faces 30% v 15% tax BUT... That is typically a fixed $3750 and is also paid from the fund. You are still better off. Some taxpayers with HELP debts of no private health should consider the effect of other levies too.

Some other "benefits" can even include how loan servicing is assessed and having a one off high taxable income can look better to lenders

 

Being a company any capital gains it pays would create franking credits. Later when the company pays a dividend it can make a fully franked dividend so the recipient can get a credit for some or all of the capital gains tax that the company has made.
The end tax rate could be nil in theory
Tax Tip 239: Bucket Companies and Diversion of Income to Adult Children with no tax payable Tax Tip 239: Bucket Companies and Diversion of Income to Adult Children with no tax payable
or it could be 47%
Tax Tip 364: Company Dividends and Top up Tax Tax Tip 364: Company Dividends and Top up Tax

 

have heard so many times accountants saying never buy a property in a company as you lose the cgt discount.

ive done lots of tax modelling now and shown many times that a company can be the most suitable structure.

in certain circumstances the overall tax position can lead to an overall tax payable of ZERO.

 

Thank you all for the informative comments!

Thank you. I guess it is back to the books for me. Hope to see this tip in the future. They are great reading, so a general thanks for those also!

Is the intention behind this towards managing legal risk (litigation)?

In my situation the intention is to immediately put cash into the bucket company. Thanks for other points, they appear to validate my current thinking.

Sort of - the same planning has also made me aware of the alternative benefit of streaming them to a corporate beneficiary (I think this is covered in Terry_w and Mike A followup posts/TT239/TT264). The accompanying risk is something I am trying to get a better handle on (and partly the point of this post).

Appreciate the other points, things I had not thought heavily about.

Thanks. I had somehow missed #239 but it is reassuring to read as it helps to validate my understanding.

Yes, I haven't gone into detailed but my napkin checks suggested that it did not seem to be clear cut to me (i.e. situational). I was hoping to keep both options reasonably open for the future. There was a page that described Div7A loans as "treating your company at arms length, like a bank, without dealing with the muppets" which certainly has some appeal. But I now need to understand them better.

 

Here is a list of my tips involving bucket companies

Legal Tip 93: Bucket Companies as Beneficiaries of Trusts Legal Tip 93: Bucket Companies as Beneficiaries of Trusts
Tax Tip 108: Using Bucket Companies to Save Tax Tax Tip 108: Using Bucket Companies to Save Tax
Tax Tip 111: Getting money out of a Bucket Company Tax Tip 111: Getting money out of a Bucket Company
Legal Tip 131: Estate Planning Implications of Bucket Companies Legal Tip 131: Legal Tip: Estate Planning Implications of Bucket Companies
Tax Tip 128: Capping your Tax Rate at 30% Tax Tip 128: Capping your Tax Rate at 30%
Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust
Legal Tip 191: Testamentary Trusts and Bucket Companies Legal Tip 191: Testamentary Trusts and Bucket Companies
Legal Tip 195: Multiple Bucket Companies as an Estate Planning Strategy Legal Tip 195: Multiple Bucket Companies as an Estate Planning Strategy
Legal Tip 196: Strategy: Personally Owning the Shares of a Bucket Company Legal Tip 196: Strategy: Personally Owning the Shares of a Bucket Company
Tax Tip 200: Claiming Interest on a Loan from a Bucket Company Tax Tip 200: Claiming Interest on a Loan from a Bucket Company
Legal Tip 207: Bucket Companies and Death Legal Tip 207: Bucket Companies and Death
Legal Tip 217: Fixing a Bucket Company Structuring Mistake Legal Tip 217: Fixing a Bucket Company Structuring Mistake
Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors?
Tax Tip 239: Bucket Companies and Diversion of Income to Adult Children with no tax payable Tax Tip 239: Bucket Companies and Diversion of Income to Adult Children with no tax payable
Tax Tip 253: Income Timing Strategies with Companies Tax Tip 253: Income Timing Strategies with Companies
Legal Tip 330: Bucket Company Trap with Foreign Persons Exclusion Legal Tip 330: Bucket Company Trap with Foreign Persons Exclusion
Tax Tip 348: Borrowing from a Related Company and Refinancing Investment Debt Tax Tip 348: Borrowing from a Related Company and Refinancing Investment Debt
Tax Tip 364: Company Dividends and Top up Tax Tax Tip 364: Company Dividends and Top up Tax
Tax Tip 365: Borrow from Company, Repay on 30 June and Reborrow 1 July? Tax Tip 365: Borrow from Company, Repay on 30 June and Reborrow 1 July?
Tax Tip 372: The Extra Compounding that can Occur with Bucket Companies Tax Tip 372: The Extra Compounding that can Occur with Bucket Companies
Legal Tip 347: 6 Different Uses of Companies Legal Tip 347: 6 Different Uses of Companies
Legal Tip 350: Grandparents as Shareholders of Bucket Companies Legal Tip 350: Grandparents as Shareholders of Bucket Companies