Bucket Company and Base Rate Entity

Is there a low risk way to make the Bucket Company a base rate entity so it pays tax at 25% than 30%?

Bucket companies can take time to accumulate wealth so in the initial years, less tax paid means more to left to invest.

What are some low risk "trading" activities to generate some income to keep the passive income below 80%?

 

Does the company has business turnover ? Then the 20% rule could impact this meaning as much as 20% or more of income may need to be turnover activity based. And be wary of Part IVA which is the general anti-avoidance rule if you rearrange affairs to satisfy the base rate entity rules.

A base rate entity is a company that both:

• has an aggregated turnover less than the aggregated turnover threshold – which is $25 million for the 2017–18 income year and $50 million from the 2018–19 income year
• 80% or less of their assessable income is base rate entity passive income – this replaces the requirement to be carrying on a business.

Base rate entity passive income is:

• corporate distributions and franking credits on these distributions
• royalties and rent
• interest income (some exceptions apply)
• gains on qualifying securities
• a net capital gain
• an amount included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.

The tax rate differential is often a unavoidable cost of the strategy

 

Doesn't have any business turnover directly. Is it possible to distribute businss income from a trust to use this clause?
"an amount included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income"

Alternatively, one may be able to conduct one-off business activities with a low chance of litigation. Would small PSI contracts work in this scenario? Though it has to be fully attributed to the individual performing the actual work.

 

Consider : https://www.ato.gov.au/law/view/document?docid=COG/LCR20195/NAT/ATO/00001

Para 23 addresses the attributed PSI question

 

Thanks @Paul@PFI that closes that PSI thought bubble.

Looks like the only two options are:
1. For the bucket company to actually have business income
2. For a trading trust to distribute business income

 

Yep. The rate differential of 30% v's present 27.5% and 2021's 26% adds a further 15% tax but in reality the extra 4% may be minor....30% is still effective v 47% of course.
Sometimes tax planning is about a package of strategies. None are a cure or solution but in aggregate can have value.

eg Company rate of 30% might avoid Div 293 tax, medicare levy surcharge and even 2% medicare and help debt minimums etc and then child care rebates etc. I have a personal dislike of new bucket company strategies to avoid child support and refuse to assist and reject the engagement. My social consciousness. Its the fastest way out my office door.

 

BRE tax will be 25% from 2021/22 onwards so you are right, a 5% differential may be minor but it'll make it attractive to individuals on 39% bracket as well instead of just the people on 47% bracket. Not to mention compounding effects of having that tiny bit extra for the bucket company to invest or not having to find liquid funds to pay extra tax each year.

 

Would share trading as a business qualify (fitting ATO's classification of a share trader) if doing it via a company or bucket company so it pays 25% tax?

 

no

 

No. And the tax rate isnt 25%

 

To clarify this:

Can someone explain where if 100% comes from a trust distribution then the bucket company is still considered a base rate entity?

doesn’t this break the 80% rule where less than 80% needs to come from non-passive methods such as dividends given to a trust from a trading company?

Or are actual distributions from a family trust that gets dividends from a trading company considered different from a direct dividend from a trading company paid to the bucket company.

 

What's the source of the trust income?

 

Active business, turnover less than $10m
- on that note I assume that we're going along the routes of, the money keeps it's nature/character, so doesn't matter who distributes it (be it direct from a trading company (corporate distribution) or trust distributions) to the bucket company, as the original income is from an active income trading stream, not a passive income stream such as share investments, then the bucket company would still be considered a base rate entity.

 

To elaborate i wrote up this, correct me if I am wrong:


Why our bucket company is considered a base rate entity.


Principle to understand is the nature of the income retains its character, regardless of how we distribute it (more on this)

That is to say, if income is from an active retail business, then the income is never considered passive, but always active.


In terms of distribution, we can have the active retail business directly paying the bucket company via dividends (possibly through an individual who is a director and/or trustee and/or beneficiary of a trust) (in this case corporate distributions) or;


we can have the income distributed to the bucket company via distributions from a family trust, which (the trust) gets income paid to it via dividends from the active retail business.


In any method, the income is considered active, not base rate entity passive income.


Passive income would be rent, or interest, a capital gain or corporate distributions of a passive method where the company is not actually engaged in the running of a business.The example the ATO uses of passive income is when it’s interest income, or if they are dividends a company received if that company is an investment company which gets dividends from the companies of shares it owns. (very tricky and poor example they used)

This would make sense as it would be foolish to further tax above the small business company tax rate if individual business owners have bucket companies that are more so used for protection of earnings and to minimise the tax on excess earnings.

 

i looked into bucket companies but didn't really see the value with all the overheads and set up fees even on the highest tax bracket made more sense just to negative gear a few properties i suppose it really depends on how much you earn.

 

For e ery $100k investment income that would be $17k pa saved in tax compared to the top rate of tax. Initially. Think of all the compounding over 30 years or so.

 

Probably would be base rate income

 

I think they have made an absolute mess with this base entity rubbish. All they have achieved is to create confusion and more red tape. It’s more effort than it’s worth trying to classify as a base rate entity. Even when you do, once you distribute dividends from the base entity to the individuals eventually you pay whatever rate the individual falls into.

I use a bucket company that gets distributions from a trust that generates passive income and is also a shareholder of an active business. It does not qualify as a base entity because the income it gets from the active business comes via its shareholding as a dividend rather than a distribution from a trust.

Either way I probably would prefer not to be considered a base rate entity. As the income source changes over time the company rate could flip and flop from base entity to the 30% rate. Each time you drop down from 30% the gap in franking credits gets locked into the company and can’t be distributed.

Example your bucket company today receives majority of its income from a trust distributing income from an active business. Let’s say you then invest that money in the bucket company and generate passive income. 80/20 will entitle you to base rate. If in the future the active business was to cease distributing to the bucket company and it now only generates the passive income via its investments, it no longer qualifies for base rate.

I am no expert but this is my understanding of it. Before taking any action I would get professional advice on a topic such as this.

 

The issues are seemingly straight forward and limited tax avoidance especially those involving franking benefits. Whether the 80% rule makes sense is less a issue. Many tax laws have arbitrary test measures eg

- CGT discount = 1 year + 1 day (366 or 367 days depending if its a leap year)
- 45 day holding period for franking credits

The 80% rule for a base rate entity was introduced to bypass a factual problem if the recipient entity didnt conduct a small business itself. eg It received part of its income from a trading trust and also had passive income from another source. The SBE rule would otherwise mean a 30% tax rate applies. The BRE rule allows a broader view EXCEPT if the bucket co receives franked income from a company.

The Bucket co may be better off lending funds to a subsidiary company that invests and defers making franked disributions that trigger the 20% issue

https://www.ato.gov.au/law/view/document?docid=COG/LCR20195/NAT/ATO/00001

 

I don't think this matters does it? The dividends are from an active trading source, so whether it comes from a trust distribution or a company dividend doesn't matter? They really need some clarification here.....