Effective positioning of a bucket company with in family trust structure

Hi All,

This is my first post on propertychat. Hope I am not posting a duplicate question. I did search on properychat and could not find any similar discussion. Also sorry for a bit of a lengthy question.

I do own owner-occupied property already. As of now, I do have some savings but not enough to invest in another property (due to borrowing capacity as I am a salaried worker).

In the current property market, its really hard to get the initial deposits just by keep saving. So thinking of setting up an investment vehicle to put money periodically to build up some equity/cash. After assessing different structures, I was inclined toward Option A (Picture below). As I won't be dealing with high-risk activity, I opted for a non-coporate trustee. Family Trust A will mainly invest in some stocks.

Putting a bucket company as a beneficiary seems to be a good option. Bucket company is owned by another family Trust B, will help to distribute dividends of the bucket company in a tax-effective way. Family Trust B does not trade and its only purpose is to get the income from bucket company and distribute it to the beneficiary.

Enter my accountant. He suggests having Bucket company as Trustee and Beneficiary. Bucket company is owned by me and wife (shareholders and directors).

Hi points out the best of both worlds. Having corporate trusty as added security and beneficiary gives the flexibility of distribution (to the shareholders). And also one less entity (Family Trust B) to deal with accounting and maintaining cost. He suggests that purpose Family Trust B can be questioned by ATO's as it does not trade and only distributes income.

My questions:
1. In the first setup (Option A), does Trust B's will be an issue in ATO's point of view?
2. In the later setup (Option B) any pitfalls other than less flexibility of distributing income?
3. In a few years, when I purchase an IP, I can have a separate corporate trusty with a separate family trust. Can I add the above bucket company as a beneficiary for IP's Trust? If so, which one would be more flexible A/B?

Thank you.

 

This is a legal question. Have you sought legal advice?

 

From a tax perspective the Family Trust Election and beneficiary disclosures need to be considered.

The costs and tax issues arising from investments in a trust need to consider costs v value. Are we talking $10K or $1m of investments ?

The legal issue of ABC Pty Ltd distributing to ABC Pty Ltd should be explored.

 

If the shareholders of the bucket company ever move overseas you are in a world of pain - that includes the trustee of your trust moving overseas or the direct shareholders.

using the same company as trustee and beneficiary is fraught with danger. You can easily get confused later on as to who was doing what and so can outside creditors.

So if cost is a driver then your accountant is correct. However I would suggest that the first option works better with a corporate trustee for both trusts.

 

Not yet. I was not sure about the depth of the question. Thanks for the heads up Terry_W!

 

May be a maximum of 200K. Once I got that, I will look into buying an IP.

 

Thank you for your insight. There will be no overseas shareholders here.

 

Can a company own shares in itself? This is the key question

 

There is no owning a self shares. Not sure where that happens. Tried to explain a bit further below,

In option A, bucket company is owned by Trust B. But bucket company is a benificary for trust A.

In option B, bucket company is owned by shareholders (me and wife). And bucket company owns trust A and also its benificary of trust A too.

 

For a $200K in investments we are talking annual income of what ....10K.
If any income is discount CGT that is lost. Franking credits wont pass on unless the income does too.
And short term. Merits of using a trust are obviously related to marginal tax rates. The trust arrangement just defers income and adds costs. It will impose a final tax rate that may be less than desired. And at what cost ?

Trusts costs what $1500+ each
Annual costs let say $1200 for both pa.

I ask - why bother?

 

Seems very elaborate (read costly) for that sort of amount. A trust might make sense if you have a non working spouse and you plan on building investments over time. But if you drain it every couple of years doesnt sound like it is worth the couple thousand to set up and all the ongoing fees.

 

A bucket company cannot own a trust.

Can you tell me what you mean by this:
"Enter my accountant. He suggests having Bucket company as Trustee and Beneficiary. Bucket company is owned by me and wife (shareholders and directors)."

The same company is acting as trustee of the trust and being a beneficiary = not good, if that is what you mean.

 

Have a look at these:
Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors?

Legal Tip 131: Estate Planning Implications of Bucket Companies Legal Tip 131: Legal Tip: Estate Planning Implications of Bucket Companies

Legal Tip 196: Strategy: Personally Owning the Shares of a Bucket Company Legal Tip 196: Strategy: Personally Owning the Shares of a Bucket Company

 

Are you both making so much money that its worth streaming 10-15k income? Even comparing 30% corporate tax to 45% highest individual tax, it probably wont be worth the costs.

 

What benefit are you trying to achieve here?

These structures are usually only beneficial for high income earners (over $180k earnings each) that are on the highest marginal tax rates.

Most inexperienced people will spend trust money or company money thinking it’s their own and end up in trouble with Div 7a issues.

If you just want to invest in shares to build up a deposit for an IP why not just buy shares in your own name? This would be the simplest option.

I think you may be over complicating things unnecessarily with these structures and your accountant might be seeing $$$ in accounting fees!

 

$200k is probably overkill for something like this, but There are benefits other than tax, such as
a) asset protection, a few different aspects
b) estate planning

 

Yes Terry, your understanding is correct. Thanks for the Heads up.

 

and your accountant suggested this why?

 

Thanks Curious2019, I am on 45% tax bracket. Wife is already in beyond 32.5% bracket. I am fully aware of the importance of maintaining transactions separately and what can be spent and not.

I am looking to set up a structure with reasonably flexible for a long term accumulation. 200K is something to start with. but certainly, the structure will go on.

I initiated this. Not my accountant.

 

The bucket company only makes sense when the individual rate is much higher, and at larger amounts. Or you need other things like asset protection or as part of estate planning.

here you might pay 3% less tax now ($500?), but lose the compounding within the trust (to avoid div 7a). if you plan on growing the trust assets, it might make sense to distribute to your wife instead.

The structure makes no sense with your circumstances and if the money will be used as a deposit in a few years.

dont ask a barber whether you need a shave.
And this doesnt sound like a good barber.