Bucket Company Tax Rate + Franking

Corporate entities that receive distributions for trusts (ie bucket companies and others) will not receive the lower corporate tax rate (27.5%) which was passed by the senate recently. Changes were made to the proposed law so that the proposed company tax cut (phased in to be come 25%) will only occur if :
1. The entity carries on a business; and
2. Satisfies the new turnover thresholds by having turnover under $10m (2017) and $25m (2018)

This means....Bucket companies and those companies which produce investment income in a passive manner (property rent, trust income, interest and dividends) will be taxed at the standard company tax rate of 30%..No look through or aggregation tests apply to a trust in receipt of franked income.. So this effectively means bucket companies and trusts that receive unit or discretionary trust income just got slugged an extra 2.5% tax.

A further issue that seems to have gone largely unnoticed is that the franking credit rules has been modified from the original announcement. The original concept was to keep franking simple and ignore the actual rate of company tax paid by a company and provide a 30% franking credit even where a lesser tax rate occurs. eg a small business company is taxed at 27.5% and the trust would be deemed to have received a 30% franking credit. That did not pass the Parliament. Instead franking must now be made directly or through a franked distribution based on the actual tax rate paid by the corporate entity.

This is an effective tax rate increase for many companies of 2.5% !!
Didnt read that in the budget did we ?

These changes will be effective for the 2017 tax period as the change backdates to 01 July 2016. Royal assent is pending and confirmed to be obtained in the current sitting and the Bills have passed both houses.

 

Sounds logical.

Of course perhaps a distribution could be made to a small business company, after weighing up the risks.
This company could then pay dividends to the bucket company.

 

Perhaps. But it only works where the shareholder is an active small business itself. As soon as share of profit hits a co or trust that isnt a small business itself its the higher 30% tax. A 14% tax hike. Chasing the lower rate of 27.5% could induce some asset protection risks however.

 

And not really worth the bother for an extra 2.5% savings.