Shareholders of a Bucket Company in a Family Trust

Hi guys, I know a lot has been discussed about using a Bucket company as one of the beneficiaries of a Family Trust to minimize tax. I also understand that to have a complete flexibility in the income distribution from the Bucket company, we should create another Family Trust to be the shareholder of the Bucket Company.
To me, this is quite complicated and costly where I need to maintain 2 trusts at the same time. My question is, do I need to decide who has to be the shareholder of the Bucket Company from the start? Can I just put myself as the shareholder of the Bucket Company first and a few years later depending on the income that I make, I can
Option 1: remove myself as a shareholder and replace with another Family Trust
Option 2: still leave me as shareholder and add in another Family Trust to be an additional shareholder

Is there any CGT tax involved in any of the options? I read somewhere that transferring the shares of the company to a trust will result in CGT. I just want to clarify and confirm if this is the case. If it is, at what basis the CGT based on? The undistributed income left in the Bucket Company?

Thanks

 

Why, it could be extremely low cost - nil - for the second trust.

Shares are allocated at establishment, transfer later will trigger CGT and other tax issues potentially as would issuing new shares.

The value of the shares would basically be the value of the company.

 

The second trust is often dormant. The bucket company acquires and builds asset over time.

The second trust would ordinary normally start when the family transitions from an “accumulation” (pre retirement) mode to a “pension” (post retirement) mode.

The ATO are increasingly focussing on circulating dividends (where the trust goes to a company that feeds back to the trust). While you can save money on the formation it is not a significant saving - especially if the second trust is dormant moving forward.

We do have clients where they opted for the single trust option but it was against our recommendation or done prior to coming to us an advisor.

 

Dont overlook the family trust election and interprosed entity electionissues either. I routinely find new clienst where this has been completed ignored in the past with risk for franking credits etc. Also some forms of income are totally unsuited to a company beneficiary. A great example is discounted capital gains. The effective tax rate on these may increase from 24.5% to 30%

 

thanks all your advice. Really appreciate it

Just want to clarify regarding the CGT if I change the shareholders of the bucket company. For example, if the income retained in the company is $100k,
Option 1: if I remove myself, it is like I sell the shares and $100k will be added to my income tax return. Is that how it works?
Option 2: if I add in the Second Trust as additional shareholder (50%-50% split), is it like I sell 50% of the shares and $50k will be added to my income tax return?

Hi Paul, can you clarify what is " family trust election and interposed entity election issues"? Thanks a lot.

 

If you sell the shares of the bucket company to a trust you will generate a capital gain for tax purposes. The sale price is determined by the market value of the bucket company shares - if you gift, dispose, transfer, move or shift the share the outcome is the same - it is a sale.

 

If the company has $100,000 of retained earnings and 10 shares then the value of the company is basically $100,000 so each share would be valued at 10% of this or $10,000

There is an argument that the shares are worth much less than this. If you sold 10% of the shares to a stranger they would not control the company and so the shares might be worth less than $10,000.
The cost base of the shares would be something like 20c so that would be a huge capital gain if you disposed of them

 

Yes valuers can do amazing things in terms of value and they are incredible at refusing to see or understand clear logic that could prove them wrong.

 

not only will there be CGT or general value shifting rules to consider but the big one often overlooked are the dividend stripping provisions.

 

I'd advocate setting it up properly in the first instance.
Unless the bucket company is paying dividends, there is no compliance cost for trust 2. Maybe an ASIC filing fee if you go with a corporate trustee.

Even if you are paying dividends (usually as a result of a div7a loan between bucket company and trust 1) I don't believe it would account for a large portion of your annual fees.

 

I dont agree that the value of a company is its retained earnings. I would be more interested in the VALUE of net assets. Eg Retained earnings can be $100K with no tangible assets and in that case the $100K cant be paid out as a dividend according to the Corporations Act s254T. This is better illustarted by comaring to a company with $100K of retained earning also with $100K of cash on hand. It may be valued at $100K OR MORE given franking credits could also apply to the dividend and be refundable even. Or it may be valued less where shareholders face a tax shortfall amount.

Companies will also typically account for assets, at cost not fair value. eg a company could own 30 bitcoin acquired five years ago. Or hold intangibles of uncertain value

 

a bucket company would generally have no assets other than its retained earnings. If it receives $70,000 fully franked dividend from a trust this would have a grossed up value of $100k. Not sure which would be relevant for working out the value - but that is a job for a valuer.

I am not sure why you would think s254T would prevent a dividend payment, but that is something the company should seek legal advice on as it is in relation to corporations law.

 

It may have lent funds (Div 7A ?) or have receivables OR have invested in its own investments. Some of these can be a timing difference after year end and others may be permanent. One strategy to avoid Div 7A can also be for Beneficiary Co to acquire shares (or units) in another company or trust (perhaps even a related entity). This may bypass Div 7A by exchanging debt for equity.

s254T doesnt "prevent" but a company may have difficulty "paying" a dividend which is distinct to making a shareholder entitled and crediting it and paying dividends are sometimes a preferred manner of dealing with dividends. esp where it is intended to be onlent. The timing issues around franking are of paramount importance too.

I believe you are assuming a circular flow using the bucket co which isnt always viable and may also be impacted by timing issues. eg to pay a franked dividend means a year of deferral so that tax is paid and then divs can be franked. Or stratgies to bring the tax forward incl FDT (franking deficit tax) Most people assume a trust can credit a distribution and the bucket co will have paid the tax allowing franking...That can be some time later.