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

Discussion in 'Legal Issues' started by Terry_w, 1st May, 2019.

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  1. Terry_w

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

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    Strategy: Personally, Own the Shares of a Bucket Company


    Generally owning shares in a company in a personal name is not recommended because of 2 main factors

    a) Bankruptcy, and

    b) Income tax

    If the shareholder becomes bankrupt the creditors will get the assets in the company by stepping into the shoes and of the bankrupt and becoming the shareholders.

    Also with owning in an individual’s name there is no flexibility with income distributions as dividends can only be paid to shareholders.



    But it can be a good idea to hold the shares in an individual name where there is no or very low risk of bankruptcy and there is no need to distribute the income.



    Naturally legal advice is needed as there are a lot of legal issues to consider, but below is an example of how this could work.



    Example

    Homer is going on in years and Bart thinks his dad has 10 years left in him, so he sets up a new bucket company with the shares of this company owned directly by Homer. Bart causes various trusts he controls to distribute to the bucket company so that when Homer dies Homer will leave the shares of the company to a Testamentary Discretionary Trust that Bart controls.

    Once the TDT holds the shares the bucket company can then pay dividends which can be directed to minor children via the trust.
     
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  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If you have a disc trust in some cases it may also be a choice as shareholder. But would I setup a DT just for that...No. It could be done later if warranted and if Part IVA isnt then a concern.

    In other cases a company as shareholder in the bucket company may work too. eg A Pty Ltd owns shares in BucketCo B Pty Ltd. Bucket Co B Pty Ltd has accumulated profit and paid tax. It may pay a FF dividend to A Pty Ltd. And different shareholders maybe ? Companies dont get refund of franking credits but if A Pty Ltd paid a FF div to its shareholders they may be refundable (at present) and at least creditable. It may be one of the shareholders in A Pty Ltd is non-resident too.
     
  3. newfound

    newfound Member

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    Let us say the bucket company was owned by Homer, and the company now holds $500,000 cash. Just wondering how the shareholder of the bucket company can later be changed from Homer to Disc Trust (DT) without triggering any CGT event.
     
  4. Terry_w

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

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    It can't
     
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  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A change of shareholder could be a value shift under tax law. eg A new shareholder (DT trustee) become entitled to CGT rights associated with company shares that were previously rights of Homer. CGT ownership can be direct (eg legal title etc) or indirect. Homer would be considered to have dealt with the company shares (being the net assets of the company = $500K cash) at market value based on the market value subsituition rule. The value would be $500K. If he had acquired 1 share for $1 then he could have a CGT event for $499,999.

    Could also be a deemed dividend (unfranked, no CGT) which may prevail over a CGT event under the double tax tie-break rule
     
  6. Anjohn

    Anjohn Well-Known Member

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    Hi Terry, I was just wondering if a Trust is the sold shareholder of a Company, can the company still lend money to its Directors (Husband and/or Wife) who is not a shareholder? Thanks
     
  7. Terry_w

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

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    A company can lend to shareholders or directors, but lots of legal and tax issues.
     
  8. BB5

    BB5 Well-Known Member

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    How about having the ordinary shares owned by individuals and having another class of shares with only dividend rights to a trust? Any issues with this approach in order to expand flexibility?
     
  9. Trainee

    Trainee Well-Known Member

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    Doesnt change the risks associated with personal shareholders, just lets you distribute retained profits more efficiently.

    What are the problems with doing the reverse: a clean trust owns the ordinary shares and the individuals own non voting share classes?
     
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  10. Terry_w

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

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    asset protection
    But the other way around is worth considering
     
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  11. Piston_Broke

    Piston_Broke Well-Known Member

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    A trust can't own the shares. A trustee for the trust owns the shares or some of them.
    And that can get complicated.
    And more entities means more expenses and admin.

    And if not done well a judge can rule there is no trust as it's all the same person.
     
  12. BB5

    BB5 Well-Known Member

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    Oh that is definitely ideal. Just doing some (over)thinking. Very low risk from asset protection

    Basically it comes down to the fact I can't be bothered with the hassle/cost/paperwork of a second trust (but would like the potential future flexibility) Tempted to have the original trust as 'z class' shareholder (yes the trustee is legal owner blah blah) But very likely wouldn't ever be needed for dividends in my situation so could pay dividends to ordinary shareholders way into medium term future. Without the somewhat contrived feel of 2nd trusts/dividend access shares in the short term and any potential future audit issues/change of legislation.
     
  13. Terry_w

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

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    plus the shares beneficially owned can pass into the estate on the death of that person and then into a Testamentary Discretionary Trust
     
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