Tax Tip 111: Getting money out of a Bucket Company

Discussion in 'Accounting & Tax' started by Terry_w, 21st Apr, 2016.

Join Australia's most dynamic and respected property investment community
  1. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney

    Company A can also buy shares in new company B so that the cashout is a equity, not a debt interest. There can be asset protection issues that benefit this arrangement that should consider legala dvice. That can bypass Div 7A (conditions apply). the shares in B can be either 100% owned by Co A or can be less with other shareholders. Company B could borrow from others or have additional shareholders.
     
    Terry_w likes this.
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    Tax Tip 322: Comparison of Dividends Paid to Resident v Non-Resident Tax Tip 322: Comparison of Dividends Paid to Resident v Non-Resident
     
    Mulianto likes this.
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Yes, but this limited in application. Whether the company can be controlled by a foreign director needs advice prior to departure. The country you reside in may affect this. If the company income were to be subject to foreign tax is a concern. The issue of other shareholders also may be an impedement.
     
  4. srod1978

    srod1978 Member

    Joined:
    21st Apr, 2017
    Posts:
    11
    Location:
    Sydney
    Hi Terry, if a bucket company is set up as a beneficiary of a trust, can that same trust be the shareholder of the bucket company? Or is a 2nd trust always required?
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    To avoid some tax issues the shareholder trust should be different to the trust that distributes to the company.
     
    srod1978 likes this.
  6. srod1978

    srod1978 Member

    Joined:
    21st Apr, 2017
    Posts:
    11
    Location:
    Sydney
    Thanks, Terry. Are there certain circumstances in which it would be ok? Or does such an arrangement inevitably run into the issues?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    If you don't mind paying 47% tax, I guess it would be fine.
     
    srod1978 likes this.
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Care must also be taken with retention of funds in a bucket company and how they are used.

    eg Jims trust distributes $100K to Jimbo Boat Pty Ltd. Jimbo's Boat Pty Ltd acquires a speed boat that Jim and his family use privately. They sought "cowboy accounting" advice from a suburban practitioner who isnt savvy with trust issues who thought it even sounded clever.

    The benefit of this is a tax concern. It creates a tax liability. Account for private use of assets correctly

    This issue also extends to holiday homes etc. Its a dangerous strategy. The ATO regularly look for ownership of lifestyle assets through title, sale information and insurers specifically to target such issues. They look for holiday property, boats and luxury cars and even race cars etc. And boat expenses are also targetted in other ways since specific tax law limits deductions for boats and what a boat charter business is. You can elase the boat and fail....If the boat isnt "surveyed" the ATO dont accept a business operates. Ditto ....other assets can be attacked same way.

    Using the funds in the company to invest to produce growth and income are not a concern.
     
    Last edited: 15th Jul, 2021
    srod1978 likes this.
  9. srod1978

    srod1978 Member

    Joined:
    21st Apr, 2017
    Posts:
    11
    Location:
    Sydney
    Thanks, Paul. Definitely plan to use the funds to invest in shares or property so no worries there.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    but who will use the company funds?
     
  11. srod1978

    srod1978 Member

    Joined:
    21st Apr, 2017
    Posts:
    11
    Location:
    Sydney
    Hi Terry, firstly, thanks for your earlier response. I'm sorry, but I didn't understand your last question... can you rephrase?

    In trying to understand the question, you're asking "who" but there is no individual at play, only an entity (the bucket co.).
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    so the company will be investing its own money? If so that is ok, if another tax entity is investing then Div7A needs to be considered
     
    Big A likes this.
  13. srod1978

    srod1978 Member

    Joined:
    21st Apr, 2017
    Posts:
    11
    Location:
    Sydney
    Yes, the bucket company would receive funds from an existing trust (as a beneficiary), then invest those funds in long-term investments to be held by the bucket co itself. I'm still in the process of getting my head around whether the above setup is better vs holding those investments in the 2nd trust that is a shareholder of the bucket co (due to CGT exemption for trusts).
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    Probably not because
    Div7A loan agreement would be needed, and
    the trustee would have to distribute the income from that trust and could not distribute to that bucket company

    The bucket company could lend back to the first trust though. You have to weigh up the accounting costs v any potential CGT savings.
     
    Big A likes this.
  15. Big A

    Big A Well-Known Member

    Joined:
    18th Nov, 2018
    Posts:
    2,390
    Location:
    ?
    Will share my thoughts since I use a similar structure. Trust with bucket company with second trust as share holder of company.
    The idea of lending company money back to trust 1 for investment purpose makes sense so you get the benefit of cgt discount via the trust. As long as you do it right and compliant with Div7a rules. Easier said than done. The longer you have this arrangement the bigger the loan grows. Managing this loan and the repayments becomes a lot of effort. Then you must consider how you will actually pay it down within the required loan term without being forced to sell investments you purchased with the loan to begin with.

    I started this process a few years ago and it’s become a pain in my backside. As of this financial year i have started unwinding this strategy and just investing the money directly in the bucket company. You can’t have it all so I have accepted that i will have to give up the cgt discount for that part of my portfolio.
     
    thydzik, srod1978 and Terry_w like this.
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    Yes I think having the company bucket invest is much better and having different classes of shares can allow for some great estate planning benefits too.
     
    Big A likes this.
  17. Big A

    Big A Well-Known Member

    Joined:
    18th Nov, 2018
    Posts:
    2,390
    Location:
    ?
    You always have the option of having both. Some assets held in the trust and some held in the bucket company. That’s what I decided on and it gives me the best of both worlds. If I need to sell assets I will sell from the trust and get the cgt discount. Assets held in the company will only sell as a last resort.

    You would want your portfolio to be of decent size to justify the cost of having both structures.


    This is another reason I decided to use the bucket company to invest in and forgo the CGT discount. Working on the estate planning side now.
     
    srod1978 likes this.
  18. thydzik

    thydzik Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    550
    Location:
    Perth
    What is a property loan agreement, is that a commercial loan agreement?
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    Sorry that must have been a false spell check. I meant to write 'proper loan agreement'
     
    thydzik likes this.
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,668
    Location:
    Australia wide
    I don't advise on overseas matters as too complex, but you would need to worry about triggering CGT if you become a non-resident and own shares and would also likely lose the franking credits plus may be taxed in the foreign jurisdiction where you are residing too.