Legal Tip 93: Bucket Companies as Beneficiaries of Trusts

May not be eligible for CGT discount.

 

There was talk of the franking credits being indexed.

 

NCCP only applies to individual purchasers - so yes.

 

so when they say company name thats the same as buying in a trust with a corporate trustee?

and what are the main benefits to this? is the only real benefit that they allow investment income to be considered with out much hassle compared to buying in your own name ? (etc)

and there any cons to buying in this structure?

 

Company on title - whether trustee or not.

Main benefit is the lenders are not bound by the responsible lending criteria imposed under the NCCP - which basically means they are more relaxed in lending.

 

Not sure what you mean by that.

I think I heard that with the current small business rate drop to 28.5%, dividends can still be franked at 30%, but I thought that normally dividends could only be franked at the prevailing tax rate, regardless of the rate when they were accumulated.

GP

 

if i bought in a dt with a corporate trustee, and buying property for flips / wraps/ boarding houses being "non coded" the loan so to speak. could i have the extra income counted for serviceability within 3 months etc or would you still have to wait the 2 years before being aloud to use it for serviceability?

i'm also told that with loc doc loans you can count the extra income straight away, but you would then have to have bought in a company structure with 2 years worth of income? :s

what would be the best way of buying these sorts of cash flow investments and having them counted for serviceability as quickly as possible to help build a portfolio and not hit a wall?

Elives

 

lenders would generally want tax returns. Low doc loans may allow less of a time period. Some low doc loans don't have a minimum period of being 'self employed'.

 

I'm a bit confused with this..

If u have a trust with a corporate trustee because this is a trust you cannot get a low doc loan?

To get low doc you need to have a company structure? Is this correct?

 

No, No and No.

Low Docs are available for all, but the NCCP doesn't apply to company borrowers, whether in their own capacity or as trustee. Therefore a company obtaining a loan under low doc policy is much easier than an individual.

 

Thanks heaps for clearing that up for me

 

Sometimes....The very nature of the bucket is the problem. Inevitable that someone wants to take some of the contents and this becomes more a reality as the pool grows. So the trust becomes less a strategy for assets and the assets end up in a company. eg : Use the company to buy other assets etc. All part of the concern. The ATO warnings included examples of holidays homes, boats etc...UPEs remain the issue. The strategy of physically paying the distribution to the company which later pays a FF seems like a fix until the marginal rate of tax is well above 50%.

The ATO view on a LOAN is that most things can be a loan even if you agree its not a loan. Converting entitlements into equity can be a strategy but with CGT concerns and a fixed allocation rather than the discretionary elements that it commenced with.

 

That is the plan...For eligible Company small businesses. I argue its a trivial difference when marginal tax rates and grossing-up of FF divs occurs.

 

Yes, if there is any upaid present entitlements then things will get messy.

Simple solution is to avoid UPE between company and trust. Avoid also borrowing money from the company.

If you want cause the money build up in the money to be invested then there are 2 choices

a) Company A lend to company B which invests - reduce risk.
b) take money out of the company as a dividend, pay tax, and then invest or gift to a trust to invest.

 

One day I hope to post here to tell you about a new client that operates a business that makes buckets .....A bucket company bucket company. I will do the BPR request for free !!

 

Presumably though that would only make sense if your annual income was highly variable, so you could do this in low-income years, otherwise you may as well just take the trust distribution in the first place.

GP

 

Yes thats true. I guess you can distribute to the company instead, if you don't need the cash now, as you never know when your circumstances may change in the future.

 

But then there's no 50% CGT discount if you want to put the money into growth assets. And if the company is just for holding funds (operating no business), then what would you do with the money?

Seems to me you'd be stuck with either paying full CGT on growth assets, in which case you might have been better off taking the trust distribution personally and investing in the growth assets outside the company (probably depend on the expected growth relative to the initial capital), or putting it into assets that primarily generate income.

I suppose you could also do a loan from the company, but as I recall, the ATO-specified interest rate is rather high, so you'd want the investment to be good so that you don't make a personal loss and just end up with more of your personal funds back in the company.

GP

 

Yes, that is true - loss of CGT discount so potentially about 6% more tax payable in the short time for CGs. You could just stream the gains out to persons and the income into the bucket company. But any subsequent investments by the bucket company or another company won't have the benefit of the CGT discount.

But against this there could be another land tax threshold and the ability to reduce income tax even further if it is held until a low income year of a beneficiary and then distrbuted

 

Better too if the company tax rate comes down more, especially if they leave the franking rate at the old higher rate.

Not so good though if tax was paid at 36% years ago and the franking rate became something like 25%. Or if they decided to remove dividend imputation altogether, which I think has been suggested at times (you know, another of those perks that mainly benefits the wealthy...)

GP