Tax Tip 234: At What Point is a Bucket Company Worth it for Share Investors?

When the trustee of a discretionary trust holding shares dividends can be passed on to beneficiaries of the trust and this includes beneficiaries which are companies. Often a company can be set up much later than the trust, yet still be a beneficiary of that trust.

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

Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust


However, Bucket Companies should only be set up at a certain point – for tax reasons – because they cost money to establish and run. For asset protection purposes they could be set up much earlier if the fees outweigh the risk.


So in relation to a trust that is a share investor how much worth of shares should be held before thinking about setting up a bucket company?

This question should probably be answered by a tax agent/accountant. My estimate is probably the trust should hold at least $2mil worth of dividend paying shares for it to be worthwhile. $2mil would generate around $100,000 in dividends if returning 5%.

Any accountants out there deal with Bucket Companies?

 

@Terry_w i would estimate that the larger accounting practice of which I am an Associate Director would have close to 300 to 500 bucket companies. it can be an exceptional tax minimisation and tax deferral tool. It is also a bit like dynamite however. In the wrong hands can be extremely dangerous

 

Isnt it dependent on the marginal tax rates of individual beneficiaries of the trust v how much they need/want? While tax benefits appear around 37k individual income, individuals might need that to spend.

 

most certainly is

 

Keep in mind that it not necessarily an all or nothing situation. Part of the dividends could go to a person and part to a company.

I have some clients living on $37k taxable income each and others living on the wage earners income and the nonworking spouse drawing out $37k and the rest into a company

 

I think it is really important to have an accountant that understands trusts, but also div7A, UPEs, subtrusts and other related areas as this can save the client tens of thousands of dollars per year. Also the opportunity cost and the compounding effects of paying less tax - this means more capital compounding.

 

Most clients find this issue complex and confusing. Using an adviser that is knowledable on these issues is important as is finding one who can explain it all in plain english as it can be quite complex.

 

Even when explained in clear English unless they understand trusts and the like it still is difficult.

I don't understand the complexity of neurosurgery but if the neurosurgeon had experience and was respected in that field then their comes a time you have to put your trust in them.

i've found many accountants who don't understand sub trust arrangements and how that interacts with Division 7a. The non tax related person has almost no chance.

 

The taxpayer will still be operating it day to day. If they dont understand all the implications, the bookkeeping would be horrifying. (Sure I just used the money in the trust account to buy the car. Its my money really right?)

 

Thats where working together with their bookkeeper or internal accountant is essential.

Monthly catchups also allow those type of issues to be raised and identified as part of the profit and loss and balance sheet review process.

Those type of issues would indicate discussions arent being had.

We have a dashboard report that clients can view everyday which is linked to xero , myob or quickbooks so enables variances to be analysed quite quickly and discussions occur.

 

rethinking this, i believe the figure could be much lower.

Even where the income of the trust was say $50,000, diverting this to a bucket company would mean it pays tax at $15,000. Diverting it to an individual on 47% tax would result in $23,500 in total tax - $8,500 in top up tax really. The immediate different is $8,500 per year, but really the company would not actually pay any tax if the dividends were fully franked, so that would be an extra $8,500 in capital compounding each year, less accounting fees.

 

Yes, every situation will vary. A business with trading income for example. Trying to find a "best fit" using a earning rate is not always the concern.

In some cases a bucket company and other strategies combine well. eg Streaming some elements of income to other beneficiaries. Some examples:
- Minors $416 tax free
- Non-residents esp for non-property CGT or where they may have personal losses.
- Refundable franking credits - individuals
- One off events
- Trust to trust distributions subject to ability, TB forms and other matters

 

`because they cost money to establish and run. `

How much money do they cost to establish and run ? I am thinking of setting up such a company. I have far less than $2m invested, possibly upto $500k. I earn maybe $25-$30k in dividends and interest. Most of that $500,000 was paid for by drawing down on existing home loans (in my name).

Of that $25-$30k, most of that is taxed at the top, or almost top tax rate, so paying maybe $14000 in tax. A company would mean I would pay $8000 in tax instead

 

I charge $1100 to set up a company with legal, tax and lending advice

 

Thanks Terry.
What ballpark figure would it cost to run the company ? Additional accounting fees etc

 

Not sure. Best ask an accountant but prob under $1000 if it just received income

 

There is a yearly ASIC fee of $267.
Most firms will also charge a 'corporate compliance fee' of around $150-400.
Then you have the tax work on top of that which is pretty simple because it's just the distributions from the trust.

I wouldn't be looking into bucket companies unless you have exhausted other options within the family group, at least up to the 37% tax bracket

 

@Calder&Scale agree entirely. when doing tax modelling on different scenarios one of the things i raise with clients is the importance of including setup costs of the structure, annual asic fees, annual compliance fees and extrapolate them over the modelling period. no point telling a client a structure will save them $20k in tax when the cost over a ten year period will be $30k.

 

$30k over 10 years is not worth it for me, if it was closer to $10k over ten years, then it would be worth it

 

agree it depends on the situation. I've done some modelling where the cost is $30k over 10 years but the savings $100k. then it was worth it.