Dividends question

Discussion in 'Accounting & Tax' started by Elicon, 1st Feb, 2020.

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  1. Elicon

    Elicon Well-Known Member

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    Hi guys ,

    Seeking your guidance if possible as I’m struggling to wrap my brain around it.

    I have read a lot about bucket companies and the initial benefits from a tax perspective if you are a self employed but ultimately when the retained earnings need to come out of the company you need to pay top up tax if on the higher income band which makes sense.

    My question is if you have a trust say distribute to a bucket company 200k and 27.5 per cent tax is paid this leaves retained earnings say of 145k in the balance sheet of the business.

    Say the following year this is fully paid out to the shareholder will the amount of top up tax on the shareholders personal tax position be based on the 145k with the franking credits attached or the 200k initially distributed to the company and tax has already been paid on it? Just trying to understand if any benefit at all actually exists or not aside from a cash flow perspective initially.

    many thanks.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    The grossed up amount would be taxed in the hands of the shareholder but they would get a credit for the tax paid.

    I think unlikley most bucket companies would pay tax at 27.5%
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    You mean company here?
     
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  4. Elicon

    Elicon Well-Known Member

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    Thanks but if it’s a corporate company I thought the tax rate is 27.5? So would I have to pay the top up tax on the 200k or 145k?

    thanks again terry.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    it would be on the $200k
     
  6. Elicon

    Elicon Well-Known Member

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    Thanks terry.

    So even though the retained profits in year 2 would be 145k I would pay the too up tax on the 200k. I guess as I said earlier bucket companies only good for cash flow and timing really.

    thanks again.
     
  7. JasonC

    JasonC Well-Known Member

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    To get the 27.5% it would need to pass several tests. One of which is something like that less than 80% is from passive income - suspect no bucket company passes this so would get the full company tax rate (30%).

    Jason
     
  8. JasonC

    JasonC Well-Known Member

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    The potential benefit in the bucket company would be to delay the income until your tax rate is lower - ie. Stop working full time, have other beneficiaries (assuming the shares of the bucket company are held by a discretionary trust) with lower income/tax rates.

    Regards,


    Jason
     
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  9. Trainee

    Trainee Well-Known Member

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    Do you understand dividend franking?
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    You would pay tax on $200k but would get a credit for the $60k the company had paid so at worse 17% top up tax
     
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  11. Elicon

    Elicon Well-Known Member

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    I guess not until now.
     
  12. Elicon

    Elicon Well-Known Member

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    This is what I thought. Just wasn’t sure on the franking credit piece.
     
  13. Mike A

    Mike A Accountant Business Member

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    Why is that if its a non portfolio dividend it may well pass the test
     
    Last edited: 1st Feb, 2020
  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I would be checking that personal services income is not involved. When I read comments about "self employed persons using a company or trust" it raises a question concerning PSI.
     
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