Bucket Company and Base Rate Entity

Yes it is confusing. But I’m that case then all dividend income would be considered as coming from an active business of sorts and is no longer passive. But if 80% or more is coming from dividends as a result of shareholding then your not a base rate entity.

 

Its necessary to consider the Commissioners view in LCR 2019/5

Dividend income and franking credits are both base rate entity passive income. The Commissioner does not have a discretion to allow an entity to be a base rate entity in an income year, if its BREPI is more than 80% of its assessable income or its aggregated turnover exceeds the applicable threshold in that income year. Non-portfolio dividends are excluded; these are, broadly, dividends from companies in respect of a 10% or greater voting interest. However, pass through and look through is not a given.

It gets messy. If a trading co distributes to a trust that distributes to a company the BREPI fails as the pass through from trust to company is not a non-portfolio dividend. The income will be taxed at 30% Example 1.4 in the LCR

 

But if 80% or more is coming from dividends as a result of shareholding then your not a base rate entity.

Umm....If 20% or more non-passive........Its also easy to ignore franking credits.

 

A dividend will only be a non-portfolio dividend, (and not passive income) if it is paid company to company, and your company has at least a 10% voting right in Trading Co, dividend paying company.

If the same dividend is paid to a trust, then distributed to your company, it will be passive income.

 

Following on from the education I received from Terry's other thread on bucket companies, I'm moving ahead with establishing a bucket co and 2nd trust.

By coincidence, I'm considering buying an established business with enough turnover to satisfy the 20% rule for BREs.

My question is, given the comments I've quoted, are there any reasons I should be holding this business within my existing trust instead of the new bucket co? i.e. Any advantages along the lines of flexibility, easier admin, eventual sale or something I haven't thought of?

 

There may be, something you need specific legal and tax advice on

 

How is the business itself structured?

 

Hi John, it is an online business which I'm buying as an asset not as an entity. So if I'm understanding you correctly, structure is not applicable.

 

There could be other reasons why you may prefer buying in trust vs holding company or the other way around.

Why not book a consult with @Terry_w He know his stuff inside out. At the point of making a transaction, it's well worth the time and money to structure this properly early on.

 

@Terry_w are you consulting for anyone other than your loan structuring clients at the moment?

 

nope

 

Does anyone know where @shootingfish may have gotten the idea about money keeping its character? I've tried messaging him/her but no response yet.

 

I have seen some instances where the bucket company started to, or was, operating a business. This was done for ease of operation, asset protection and estate planning reasons.

A side impact of the decision to operate a business, within the bucket company, was that the trust distributions became taxed at the lower company tax rate. I think example 1.2 of LCR 2019/5 contemplates a similar situation.

This situation only works in rare instances. The tax effect was a side effect of a decision driven by lower administration costs, asset protection and estate planning. So careful advice is needed.

 

Certainty at last for base rate entities ... or not? | TaxBanter Blog
Distributions from partnerships and trusts: para. (g) A question often asked is: What tax rate applies to a corporate beneficiary?

This discussion is confined to trust distributions but the principles apply equally to distributions from partnerships.

Broadly, the answer lies in the character of income received from the trust.

Under the new rules, the character of income derived by a trust flows through the trust for this purpose. So if the distribution from the trust comprises at least 20 per cent business income, then assuming the distribution is the only income of the corporate beneficiary, the company will not have BREPI that is more than 80 per cent of its assessable income, so it will be taxed at 27.5 per cent.

However, if the trust distribution instead comprises rent, interest, dividends, royalties, capital gains etc. then the company’s BREPI will exceed 80 per cent of its assessable income, so the company will be taxed at 30 per cent.

Under the new BREPI test, a trust distribution received by a corporate beneficiary must be dissected into its:

• BREPI component (i.e. that part of the distribution which is attributable to the trust’s BREPI such as rental income); and
• non-BREPI component (i.e. that part of the distribution which is attributable to the trust’s trading or business income).

The BRE Act explicitly clarifies that income will retain its BREPI/non-BREPI character when it flows through a chain of trusts or partnerships.

 

Usually. I just saw a example last week where someone attempted to achieve the base rate entity test through a trust chain. Unfortunately the business income arose from a dividend and the former accountant "looked back" and disregarded the chain. It didnt help that the dividend for the active business was paid to a entity that wasnt even the shareholder !!

 

Thanks for sharing, John!