Tax Tip 108: Using Bucket Companies to Save Tax

Thanks Terry, I thought that might be the case.

I suppose it's fairly unusual for the Corporate Trustee to be Trustee Beneficiary as well which means a Shelf co. would be necessary.

Would you normally recommend a Bucket co. register for GST even if the income will never be subject to GST (Dividends and bank interest only)?

 

Can't see why a bucket company would need to register for gst

 

Technically, a bucket company will not have reason to obtain an ABN so it cant register for GST. A voluntary registration for GST would make no sense if there were no taxable supplies. Any GST claimed on expenses would in incorrect and liable to penalties and repayment.

Ironically a ABN is issued on company formation BUT it is not a number the ABR (Australian Business Register) recognise until application for a ABN is made to make it active when all the details are provided.

It is neither usual or unusual for a corporate trustee to be a trust beneficiary. The terms of the trust deed may allow or prohibit this. There may also be legal reasons not to do this. There may also be tax reasons. Its why DIY formation and trust matters can be a risk.

 

anyone ever used a UK company as a bucket? On the cfc excluded list and lower tax rate...

 

The ATO would assess tax at a different higher rate to a non-resident beneficiary (actually assess the trustee). And the UK company could even be a resident taxpayer in Australia if poorly planned and implemented. A UK company may be subject to AU tax if its central management and control is Australia. The ability for claiming the tax credit may be a issue. And the issue of a Family Trust Election may arise.

 

As you can guess my bucket investments did not perform fantastically well last year.I was thinking I could borrow 1.5m from it to buy another PPOR, and paying interest to the bucket instead of paying a bank.
Is it possible ?
Which interest rate should the bucket charges me ?
Should the loan be secured by the property (as it would be with a bank)
I suppose the bucket will pay 30% tax on these interest revenues.

Thank you

 

Yes, but you will need to have the loan under division 7A terms and the rates will be higher than that of a bank.
5.20% atm
Division 7A - benchmark interest rate

 

Thanks a lot

 

The D7A terms may require a short loan term unless the loan security terms are met. eg The $1.5m loan must be repaid within the 7 year term if the loan is not secured. And the ability to "refinance" is limited.

One other factor often ignored in this process is that the D7A loan isnt a nudge nudge wink wink loan. A liquidator could demand repayment. In the process of administration / liquidation and creditor enquiries into business failures these sorts of loans can pose a personal liability risk and can even lead to personal bankruptcy.

Reasons why legal advice and drafting agreements etc is important

 

And proposal is to move them to 10 year terms.

 

Secur d loans can be 25 years I think?
I have never recommended one for a client but just because the right circumstances haven't arisen.

 

Yes...Not a 25year term for secured loan, no IO loans and all terms become 10 years. A massive cashflow burden for some existing secured loans. But simpler compliance with no written loan agreement required - BUT written agreement to a D7A loan must still occur.

There is a balloon timebomb issue for existing 25 year loans however. From 2021 these must be converted to a 10 year loan or its a deemed dividend.

The nasty one is removing the concept of distributable surplus. The value of the amount paid is assessable rather than the amount limited to tax based on company profits.

Targeted amendments to Division 7A

 

And a further nasty surprise in that all subtrust arrangements must convert to division 7a loans with a 10 year term. No interest only payments as currently exist under a sub trust arrangement but p&i

 

Sub trust arrangements have been awesome. As an effective sub trust arrangement has allowed interest only for 7 years under option 1 which has been a very effective tax planning strategy.

 

if there is a corporate trustee and a discretionary trust.
can the corporate trustee be the bucket company?
can the bucket company's dividends feed into the existing discretionary trust?

 

Yes it can, but it probably shouldn't.

 

why shouldn't it? what's the risk?

 

s100A for starters

 

Reimbursement arrangements. Another area forgotten about by many practising accountants.

 

what do you mean by this comment? etc repaying the loan principal and interest both is then seen as taxable? i think i'm way off :s