Bucket company structure question

General advice only.

Here's a diagram of existing structures:


So the problem I'm trying to solve is -
1) I run a business, I want to pay myself and wife a PAYG wage that's not excessive to avoid high marginal rates.
2) The business is accumulating income faster than I can pay PAYG out at the rate in point 1
3) Therefore I'm investigating having a bucket company collect the excess business income, better that than leaving it in the business that might get sued one day.
4) Should I use an existing company in the trust or start a new company owned by the trust to be the bucket? Basically I'll be a payg employee of the bucket company and the bucket company will get consulting fees from the business. I prefer to use the existing business to save yearly fees but not sure of any implications - any suggestions?

 

I can't answer 'should I' questions but if you are diverting income into a company that holds assets such as property there is a risk that the company could get sued by a tenant.

If the company will be buying land then you need to consider the landholder/land rich provisions for stamp duty too and land tax also.

If the bucket company is contracting with the trading company you will then need to consider contractual risk.
PSI rules considered?

Also what do you mean by 'a company in a trust'

What about the estate planning effects on death or incapacity or all the major players?

 

Thanks very much Terry, as always your posts are very helpful

Yes I've considered the risk of being sued by tenant if I reuse the old company... it's a risk I can't eliminate so that's why I've been considering starting a new one, but for such a tiny risk I'm not sure if the costs of starting and running a new company entity is worth it. I mean, we all take tiny risks everyday... like driving, crossing the street etc... still undecided here.

As for the other points:

I control the business pty ltd so no contractual risk or risk of the business pty ltd suing the bucket company

'company in the trust' i was referring to holdings pty ltd whose shares are owned by the trust

I have NOT considered PSI rules, will read up on this. Thank you!

I have considered estate planning issues when setting up the trust so I guess when I croak in 50 or so years, those rules will apply. Not too concerned about this at the moment to be honest.

 

Although you might control both the company and the trust now this control is only temporary. If you become legally disabled or dead the control will pass. The company itself may also become controlled by others such as administrators for example and they may enforce contracts.

 

Thanks Terry, haven't considered that at all. I guess when I draft the consulting agreement I'll keep it as simple as possible and as a 'one-off'.

 

So after reading up on PSI rules and when they're applied, seems like I can't do what I want.

So now a new question (probably should start a new thread) - how do I get money OUT of a trading pty ltd into a safe and separate pty ltd?

 

a) DT as shareholder of the trading company.
Trading company pays a dividend to the trust and the trustee distributes that to a corporate beneficiary - the bucket company.

b) Bucket company is the shareholder of the trading company.

 

Fully franked dividend
Winding Up (depending on ownership)
Consolidation Group ?

 

Thanks all for the suggestions

With b) will the franking credits be retained by a company shareholder?

so for example, A owns B. B pays A a fully franked dividend of $70. Will A have $70 and $30 franking credits which it can then pass onto a human shareholder in the form of $70 dividend + $30 franking credits? Or will it be taxed on the $70 as revenue... so $49 and $21 in franking credits with the first franking credits lost forever?

 

franking credits will pass on.

 

The franked dividend can be passed on to A. Or shares could be transferred to C or new shares issued to C. C can be a person or another company. The franking credits flow through if the recipient is a tax resident and franking rules are complied with. The timing of franking credits can be in different tax years. eg The FF dividend could be paid in three years time. The company maintains a franking account that accumulates as tax is paid.

Dividends also dont need to be paid. They can be credited in the company accounting records to be drawn later provided the dividend is declared and accounted for (subject to the Constitution)

 

Thanks Paul and Terry!

So in my simple example above, I own A, A owns B. B pays A $70 fully franked dividend, with $30 of franking credits. B earns nothing else, so after tax it has $49 and $21 + $30 = $51 of franking credits? Or something else?

 

Grossed up wouldn't the dividends be $100?

 

Assuming its a bucket company rather than a SBE then a $70FF div represents $100 taxable income. The marginal tax rate is applied to the dividend to determine the tax impact (ensure you allow for Medicare levy). Then deduct the $30 tax credit... Balance is the tax shortfall due to your marginal rate vs 30%....

eg at an income of $88,000 the marginal tax rate is 39% (incl Medicare). So tax on $100 is $39 less $30. Taxpayer owes $9 (ie 39% - 30% = 9%)

If its a SBE then the $70 FF div has a tax credit of $26.55. Tax on $96 is $37.44 less $26.55 = $10.89. Thank Mr Shorten for the 21% increase in tax shortfall. Its like his award wage deals that unions negotiated that are less than award rates