Tax Tip 111: Getting money out of a Bucket Company

Getting money out of a Bucket Company

A bucket company is usually a company set up to receive and hold money, often distributions from a discretionary trust. It usually would not trade. The reason people want income diverted to a company is because companies are taxed at a lower rate than many individuals – currently 30% for a company compared to 49% for an individual.



But once the money is in the company it cannot be used without tax consequences.



Here are some things to consider together with your tax advisor:



Lending money to shareholders or family members

Any loan to family members would be a deemed dividend (Division 7A ITAA1936) unless a property loan agreement was entered into with a specified interest rate. The problem with this is that where the funds will be used for personal expenses the interest that the recipient of the money pays the company will not be deductible, but it will be taxable income to the company.



Lending money to a related trustee

Similar to the above, the money will usually be deemed to be a dividend unless a loan agreement is entered into.



Company can buy property

Division 7A loans do not apply where Company A lends to Company B. The bucket company will be building up cash reserves. It can use this cash as a deposit for an investment property, or if it has enough it can buy a property outright. Perhaps this is not a good idea for asset protection, though. A better option may be for Company A to lend to Company B with B buying the property.



Lending money to a related company.

Money can be lent for various purpose such as starting a business or buying shares of buying property. There would be greater asset protection if the company holding cash didn’t do this itself, but lent the money to another company.



Pay Dividends

Dividends can be paid to shareholders. The dividends may come with franking credits for the tax already paid by the company and the recipient may receive some tax back if their marginal tax rate is lower than the company rate. If this was the case the trustee would usually just give them the income directly.



Delay Paying Dividends

Trusts cannot retain income unless the top rate of tax is paid. Companies, on the other hand, can retain income and pay a lower tax rate. So it may work out better in some cases if trust income is paid to a company in year 1 and then in year 2 the company can pay a dividend to the shareholder when they are on a lower income.



Employ Family Members

A company is able to employ people can claim the wages as a deduction – but this can only happen if the company is running a business and the wages are related to the production of income and work is actually done.


See also:
Tax Tip 108: Using Bucket Companies to Save Tax
Tax Tip 108: Using Bucket Companies to Save Tax

Legal Tip 93: Bucket Companies as Beneficiaries of Trusts Legal Tip 93: Bucket Companies as Beneficiaries of Trusts

 

Good post!!

Most taxpayers have the problem of trying to get the money INTO the bucket company! - ie have not reduced the unpaid present entitlement via annual dividend or loan repayments and the timebomb comes to fruition with the loan/UPE needing to be paid.

Cowboy Accountants create a real mess for clients if they don't understand or manage UPE's correctly. To be frank, 95% of Accountants wouldn't have enough in depth knowledge to manage them, most have enough trouble trying to comprehend them, Nevermind having effective strategies to utilise them in an efficient way.

Again - good post Terry..

 

Thanks GG. I like that term 'cowboy accountants'.

I will next do a few posts on UPEs.

 

Please!

 

Here is the first post on UPEs
Legal Tip 125: Trusts and Present Entitlements

 

Hi guys,

I am quite interested.

I am currently operating under a corporate trust with myself and my wife as beneficiaries, each receive 210k ( 180k +30k in super), I am fine with this tax rate.

if the AUD drops further, our income could be around 600k next year, which would leave at least 180k taxed at 49% !!!

Can I just setup a "bucket" company to receive this extra 180k and it will be taxed at 30%, and receive this cash as dividend "tax free/or with tax back" later on (5-10years) when my income is reduced ?

any risk with the ATO ?

I ll check with my accountant of course/

Thank you

 

Deck - possible in theory, but all all depends.

 

Thank you

Do you mind to expand a bit on this "all depends".Thanks a lot

 

Residency will effect tax.
Type of income will effect it too. Capital gains from a trust would be better to come straight to beneficiaries rather than into a bucket company.

Perhaps franked dividends as well in many cases.

 

I am Australian resident for tax purpose, my business is online (incorporated here, US customers only), no CapitalGain, just cash.

Anyone with experience on this matter ? Thank you

 

Also
I was thinking, for safety, should I have this bucket company's shares owned by a Trust ( with us a beneficiaries) ? would the franking credits still flow to my income (from the trust) ?

Thank you

 

Yes that should be seriously considered - having a discretionary trust own the shares of the bucket company. But there are various things to consider, especially on the estate planning aspects so seek legal advice before setting up

 

Thank you

Can a bucket company setup like this be seen as a "scheme" to avoid tax by the ATO ?Tx

 

Possibly in some circumstances, but generally not I think.

 

Yes where it does not comply it could. The ATO have issued Taxpayer Alerts TRs (ie TR 2010/3) on unpaid present entitlements and use of interposed bucket company arrangements to circumvent income tax payable by shareholders and associates.

However first and foremost the ATO would not look to Part IVA. Div7A and s100A and other relevant law would be applied first. In practice it is common for the ATO to either also assess on the basis of Part IVA at the time of issue of amended assessments or reserve right to do so.

 

Thank you Paul,

to my understanding this TR 2010/3 mainly apply to loans to shareholder, I would jut like to defer dividends few years down the track.

 

That a benefit of use of a company v's a trust that is obliged to distribute. It can result in a higher overall tax rate in the long run but wont be subject to super, payroll tax, workers comp and other add ons. Timing can be planned around post retirement perhaps when incomes are lower for shareholders etc

I have seen some businesses accumulate very large franking accounts and in retirement the shareholders draw down franked dividends which are refundable. This can lower the marginal rate in the long run under 30%

 

Thank you

Yes ( and we need to setup our will too !!) what estate planning aspects should I check about ? thanks a lot

 

Imagine the bucket company has shares owned by a discretionary trust. These will not pass via you will. If you control the trust now consider the control only temporary as if you lose capacity or die the trust will continue under the control of someone else.

 

Great post! How about if you want to pay dividends to a non-resident shareholder? i.e. I have accumulated some cash in bucket company and considering moving overseas to work. Then I can pay dividends to myself without additional tax as company has already paid the 30% company tax.