Tax Tip 111: Getting money out of a Bucket Company

Non resident shareholders lose franking and there is no withholding BUT unfranked needs to have withholding remitted. If a trust is involved its a whole different issue.
I dont see a concern other than the problem of your Corporations Act compliance. A company must have a resident Director at all times.
Advice on ceasing residency is a important legal issue

When a company has large accumulated franking balances there can be strategies around specific dividend timing. eg early July just prior to departure and while income is low etc. And timing of tax payments too.

definately worth planning

 

at least one director that is 'ordinarily resident' - which could mean someone is not a tax resident but still a person that is ordinarily resident. There is no case law on this as far as I know so it is a bit of a grey area

 

Hi guys,
Just wondering if there are any issues with the following:
Assuming the trust wants to retain the cash, is there any issue physically distributing to wipe out the UPE and then taking the cash out on July 1?

If the money is in the company bank account at 30 June each year, is there any issue?

 

Taking the cash from the company? If so that would be a Div7A issue.

 

Yes, but returning all funds to the company by June 30. There would be no outstanding div7a loan/ UPE at year end.

Is this still an issue if you do it every year? Take the money out and return it?

 

Yes, there is a specific subsection which deals with this.

 

s 109R(2)
INCOME TAX ASSESSMENT ACT 1936 - SECT 109R Some payments relating to loans not taken into account

 

Cheers Terry.

Although I'm not entirely sure which subsection you are referring to. I assume it's this:

A payment must not be taken into account if:

a person would conclude (having regard to all the circumstances) that, when the payment was made, the entity intended to obtain a loan or loans from the private company of a total amount similar to, or larger than, the payment;

 

yes thats it

so that would mean the loan isnt repaid if it is just going to be lent out again.

 

I'm probably going to have to set something like this up.

If the stage 3 tax cuts applies from 2024 where its a flat 30% tax in bracket $45,000 to $200,000, it seems like it will be an easy way to get the money out then as dividends with no tax paid by the individual?

While waiting for it, the only way to get the money out is to lend the money back to the trust at commercial terms? The trust has an interest expense, the company receives interest income? affectively no additional tax implications?

Once the money is out through dividends the loans can be paid back?

 

the bucket company can shift the ultimate point of taxation to future tax years so if the rate of tax at this point is low then now you might save tax just be delaying the point at which the income comes out of the company

 

but how to make use of the shifted money till future tax years?

commercial loan, with the bucket company claiming interest income, and the trust claiming an interest expense?

 

I think I covered this in the first post.

The bucket company could invest itself, or lend to a related party on a Div7A loan agreement, or pay a dividend

 

thanks, it was answered in the first post.

follow up question. is it possible to make the dividend distribution discretionary?
normally a company's shareholders are fixed, can the dividends be paid back to a discretionary trust?

 

Dividends can only go to shareholders - which might include a trustee of a discretionary trust.
Also companies can have different classes of shareholders and dividends can be paid to some classes and not others.

 

I found a new issue with taking $$$ out of a bucket co. Its a first. A new client.

The former accountant has paid a dividend to a entity that isnt even a shareholder !!! Not once, twice. I say its not a dividend as it fails the Corporations Act definitions (s254T) so the tax lodgements have falsely reported a payment that was a loan as only a shareholder can be entitled to a dividend. Not even a Div 7A issue. Technically this means the true shareholder may have evaded tax if a shareholder directs another entity to benefit from the cash proceeds of their declared dividend ? They didnt declare their dividend. The other entity doesnt get franking benefits either which is another problem....Or does it render any dividend resolution fatal as if it never occurred ?

Pending legal advice.

 

directors have breached their corporations act and common law duties and could be personally liable too.

 

They wont sue themselves (ie beneficiary v Director hats) and no external parties are actually impacted. But yes if they were a family unit like a wealthy iron ore mining family you never know. Could expose trustee assets (indemnity) or personally to a beneficiary claim.

I recall a case involving a former client years ago. He had divorced and settled property etc. Then along came a trust issue with a ATO decision ofn a past scheme that allowed his ex to sue on the basis she has been denied trust entitlements in past years and it opened that closed door again. He had to pay her more to make it go away. The ATO had contacted her as a party to a former scheme that was settled with the trust that gave rise to a major amendment (refund) in several years v's tax payable in others more recent. She wanted her cut of the refunds and didnt need to pay a share of the payable as was now exclude a s abeneficiary. The property agreement was silent on this issue. Silly really as the soliictors knew about it but assumed the ATO would never allow the scheme.

 

Yes unlikely to sue themselves if they are the sole shareholder and director, but they still can after death - they might leave the shares to person x and the executor might be person Y.
But where other people are involved, while alive, it is a greater risk. Divorce also brings out this risk much more.

 

Saw these on a whirlpool post. Any comments @Terry_w

Curious too know about the hybrid trust option

Short term loans from the company can avoid Div7A, basically you need to repay them before you do the tax return, which may be in Feb or later. This can be a handy way of managing director fees or dividends, on paper declare them by 30 June and lend the funds back to the company but bank transaction them before the company tax return is filed.

Finally, consider setting up a hybrid unit trust. Rather than a long term div 7A loan, your company can buy shares in the hybrid trust which can use the additional funds for investments. Any capital gains on those investments can be streamed to individuals whereas the dividends are paid to its shareholders (the company).