Legal Tip 350: Grandparents as Shareholders of Bucket Companies

Where family circumstances permit, it may be worth considering having a bucket company owned by the oldest person in the family.


Example

Bart is a beneficiary of a discretionary trust that he controls. The trustee is about to sell a property with a $1mil capital gain, so tax planning is underway.

One option would be to distribute the capital gain to a new company, which will be set up solely for this purpose – A bucket company. You may think companies pay 30% tax and individuals less than 25% on capital gains, but the 30% tax on the company is not the final tax – it could be as low as 0%.

Bart’s family circumstances allow for the following from a legal point of view with minimal risk.

Bart sets up a company with himself as director. The sole shareholder of the company will be Bart’s grandfather who is 90 years old and has already done his will creating multiple Testamentary Discretionary Trusts (TDT).

The trustee makes the capital gain and it is distributed to the new company Gramps Pty Ltd. $300,000 tax is paid and $700,000 is the profit after tax which is invested in shares by the company.

2 years later Grandpa Simpson dies and the shares in this company are passed to the executor and then to the trustee of the TDT.

There are 10 children in the family under 18 years of age.

The company pays a $200,000 dividend (after grossing up). This goes to the TDT trust and then out to the 10 kids at $20,000 each

The kids are taxed at adult tax rates as this is income derived from a deceased estate so each of the kids pays no tax. Each child receives $14,000 plus $6,000 in franking credits for the tax the company had paid. Because no tax is payable this $6,000 is received as a refund from the ATO.

This continues for 5 years with $200,000 coming out each year.

The end result is the $1mil in capital gains has come out of the trust tax free.

 

Sound like the family trust election and test individual will be a factor anyway. (Basic rule is - Could more than $5K of franking credits be involved ??) Without it NOBODY is entitled to the apparent franking credits.

Control and succession and issues if the eldest dies may even be a concern. I would be suggesting tax and legal advice on those issues and on the matter of succession, control etc.... that element is always legal advice.

 

No franking credits with property, but the Trustee of the discretionary trust would need to make a family trust election if any beneficiary had more than $5k in franking credits from the dividend distribution of the company.

Lots of other legal issues to consider as well.