Trust and bucket company - income going back and forth

A trust owns a company, and the company is also a beneficiary of the trust, and the trust distributes income to said company, the company will pay tax and accumulate some franking credits.

At a later date, the company issues dividend to the trust (since the trust is the sole shareholder). Are there any problems with this structure? Is there any double taxation happening here?

 

Many issues.
No double taxation though.

 

Can you point me in the right direction(s) regarding possible issues?

Basically I have positive trust income and negative bucket company income and I want to offset them into the company instead of distribute to human beneficiaries (marginal tax rate too high this year).

 

Seek legal advice.

 

Thanks Terry, eventually will do, just want some preliminary info to think about.

You posted the below in your Legal Tip 93 post - you wrote "he company can make a dividend payment to its shareholder which would be another trust" but didn't specify why it should be another trust - what was the rationale there?

 

It the shareholder of a bucket company was a person there would be many issues
- asset protection
- no tax flexibility

are the main ones.

 

Legal advice - tax lawyer or trust lawyer?

 

Tax lawyer. Most will know trusts well.

 

s100A

 

I was following up on this as well @Terry_w and @scientist and came across the following link Trust taxation - reimbursement agreement

From the above link, the 2nd last paragraph of Example 5 says "The agreement is designed to achieve a reduction in tax that would otherwise be payable had the trustee simply accumulated the income."

If the trustee accumulates the income, the trust pays tax at 45%, therefore most private family trusts will distribute income as the individual beneficiary is on a lower tax bracket than 45%. So just about all distributions from private family trusts are done to achieve a reduction in tax that would have otherwise been payable if accumulated in the trust.

So could that mean that even if a private family trust distributes to a beneficiary individual (on a lower tax bracket than 45%) and then that individual lends the money back to the trust that it could constitute a reimbursement agreement and invoke section 100A?

Further down the same page under Other Integrity Measures it says "Part IVA of the ITAA 1936 (see Taxation Determination TD 2005/34, which outlines an arrangement where Part IVA rather than section 100A would apply). Similarly, Part IVA was applied in McCutcheon v. FCT 69 ATR 607; 2008 ATC 20-009 to an arrangement involving the interposition of a series of trusts which appeared to serve no commercial purposes other than to avoid the application of section 100A.

So @Terry_w your diagram of having the shares of the bucket company owned by a separate trust may be construed as a series of trusts which appear to serve no commercial purpose other than to avoid the application of Section 100A and have Part IVA applied - what other grounds/commercial purposes would you say were the reasons of the structure?

It appears a lot more complex than first meets the eye

 

Yes it is very complex and you would need costly legal advice to be sure.
Hint - the 2 trusts may have different beneficiaries and/or control be passed to different persons.

You also have to consider family trust elections.

 

It appears the McCutcheons paid $144,000 for advice and 5 years later the commissioner hit them with Part IVA.

It would seem paying for costly legal advice doesn't always provide surety

 

Wow, nice fee for the lawyers.

Part IVA could apply to almost every situation. The only surety is a private ruling.

 

Can the trust distribute to that company?
Is the distribution valid?
Family trust election validity ?
Part IVA ....