Tax Tip 421: Children Borrowing from a Bucket Company?

Can a minor child borrow from a related company? Yes potentially they can and this could be from a related company that is acting as a bucket company. A bucket company is a company that doesn’t trade and it just exists with the sole purpose of receiving income from a trust.

In a recent post I showed how a minor child could borrow to buy a property. They could potentially borrow from a bucket company to buy this property.

See Loan Tip: Can Minor Children Borrow?

Example

Lisa is 14 years old and has been earning a lot of money from acting. She has $200,000 in the bank. She wants to buy a property which she will rent out. But they prices are around $500,000 meaning she will need to borrow around $330,000 or so. But no bank is going to lend to a 14 year old. Homer is director of Simpson Holdings Pty Ltd which is a corporate beneficiary of the Simpson Family trust and it has a lot of retained earnings. The company could potentially lend Lisa the money she needs. She would need to enter into a written loan agreement that complies with Div7A ITAA36 and benchmark interest applied – but it could potentially be a 25 year loan under a registered mortgage as security.

Once Lisa is 18 she can potentially refinance with a bank lender and the company can receive its money back.

Lisa would also need to pay PI over 25 years at a benchmark rate which is currently 4.52%. But she can borrow more than she needs and keep some of that cash for repayments.