What to do with Bucket Company income?

Discussion in 'Business Accounting, Tax & Legal' started by Propagate, 2nd Jun, 2019.

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  1. Propagate

    Propagate Well-Known Member

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    The distributions into our bucket company are staring to add up to a decent sum, and will continue to do so for the next few years.

    I'm wondering what we can do with it rather than it sit here essentially attracting the square root of bugger all interest.

    From my limited understanding, we could use the Bucket Co. as an investment company of sorts? Use the funds in the bucket to purchase some type of investment, any returns being profit to the bucket? Not sure I want to go down this patch as the money in there is also our main emergency savings buffer should we ever need it.

    Another option maybe to let it keep building until there's enough to buy outright one of our current IP's (by refinancing it away from the bank to the Bucket Co. effectively). Haven't thought this through at all yet, so don't know if it's feasible. possible or would result in any benefit.

    The simplest thing I can think is for the Bucket to lend me the money and I sit it in the offset against the PPOR mortgage, but as I understand it that has to be by way of a loan agreement with interest paid back to the bucket? SO, not sure how that works, would the interest saved in the offset be cancelled out by paying interest to the bucket loan? Then again, the bucket money is ours so the interest paid to the bucket becomes our anyway? I'm struggling to get my head around that one.

    Would love any suggestions/ideas on what we can do to make use of the funds rather than them sitting idle.

    Cheers.
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Divert to +1 as director's fees when her income drops off.
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    I have written a loan of tips on bucket companies, have a search in my legal and tax tips, but basically these are the options
    a) have the bucket company invest
    b) have the bucket company loan to a related entity - Div7A

    A bucket company cannot loan you money and for you to park that money in your offset as this would be deemed a dividend if you did not have a complying loan agreement with the company at the benchmark interest rate.

    The company could lend the trustee of a another trust who could invest, but would need to be a Div 7A loan and care must be taken to avoid being taxed at the top rate.

    You could borrow the deposit for an IP, or the whole amount, from the company, at Div7A rates. Later refinance this to a bank when you want to cause the company to pay a dividend.

    Who owns the shares of the bucket company?
     
  4. Propagate

    Propagate Well-Known Member

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    Hopefully +1 will be back on top form soon enough for that not to be an option.
     
  5. Propagate

    Propagate Well-Known Member

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    The shares in the bucket are directly owned by myself and my +1.

    It seems the simplest thing to do (other than drawing down in a low income year), is to use the Bucket as an investment company and invest in something, trouble is, being as it's also acting as the emergency buffer, that investment would need to be relatively low risk and easily liquidize-able.

    I'll go search out some of your tips @Terry_w , thanks.
     
  6. Propagate

    Propagate Well-Known Member

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    I think I need to wrap my head around this one, i.e. a complying loan agreement between the Bucket and myself (with interest) and park the money in the offset. It's probably the safest option in terms of using the funds, but I need to get right in my head how the loan agreement and interest paid back to the Bucket works. I'll run it passed the accountant when we catch up in couple of weeks too.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    You might be able to get away from a loan agreement once in the first year if you borrow from your company and park in the offset account. If you do it more than once you would be in div7A territory. But you would need to consider the corporations act issues as you are using company funds for your own personal benefit.

    However, I suppose that there might be a benefit if you borrow from a related company and you pay 5.2% pa to that company rather than 4% to a bank because you are indirectly benefitting by building up the company's assets rather than a 3rd party lender. The interest won't be claimable by you though and the company will have to pay tax on the interest income it receives.
     
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Perhaps consider starting a new bucket company too, one with the shares held by the trustee of a discretionary trust, a new one, as this will give flexibility in paying out dividends down the track. Seek legal advice on this though.

    And make sure you have a Testamentary Discretionary Trust in your will.
     
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  9. JasonC

    JasonC Well-Known Member

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    Propagate,

    Did you ever reach a conclusion on this? I'm considering the same issue. The way I see it is that the Div 7a loan option lending to a trustee of discretionary trust would add quite a bit of complexity that I'm not sure I'm after at this stage.

    I'm pondering using the bucket company for the high income/low growth investments part of my portfolio (as there wouldn't be 50% discount on capital gains for the company). I could reinvest the dividends within the bucket company.

    Thanks,

    Jason
     
  10. Ross Forrester

    Ross Forrester Well-Known Member Business Member

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    If the bucket company has cash it can lend to the trust to buy property. The bucket company can take a mortgage and the repayment term is 25 years.

    It is important to note that their are proposed changes for secured Div 7a loans effective 30 June 2022.
     
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  11. Propagate

    Propagate Well-Known Member

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    @JasonC no - I haven't done anything with/about it yet, the cash is just stockpiling in there at the moment.

    I'm rapidly losing enthusiasm to work though, I might look at putting another couple of hard years in then take a year off or something and draw down some of it then in a low income year. Not sure. I don't really want to do that as it will form part of the retirement pot, but it's been a full on 3-4 years since setting up the company and I;m starting to feel like if I don't take a decent break I'll end up a gibbering, empty husk.
     
  12. Lacrim

    Lacrim Well-Known Member

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    Can you sell a loss making investment property to the bucket company (at a discount) to reduce the taxable income?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Yes it is possible but many issues.
     
  14. Lacrim

    Lacrim Well-Known Member

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    Might have to pay stamp duty but apart from that, I didn't think it was too hard?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Its not too hard, but you still need to consider things such as
    - estate planning
    - asset protection
    - land tax
    - CGT when sold (no CGT discount)
    etc

    and then the other options.
    - Bucket company lending to another company - extra asset protection by segregation
    - Bucket company lending to you or other family member, even one of the kids, on Div7A terms with that person buying in their name and claiming the interest
    etc
     
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  16. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Bucket Co can also buy shares and invest in another company which invests on market.
     
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  17. Big A

    Big A Well-Known Member

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    I have a similar set up that I have used for a few years now. Yes it adds significant complexity to use and manage such structures. But I think a key benefit of using a bucket company is then to go on and use the funds in that company to invest in the most tax effective manner.

    I have a trust with a bucket company. I invest some of money in the bucket company in income earning assets such as contributory mortgages so no capital gain component. Then I lend the trustee of my family trust the remaining money and it invests it in income / growth assets such as property and shares.

    Yes it is a pain managing all this and I have learnt so much in the last year from the likes of @Terry_w and @[email protected] on how to do it right. I actually find it very interesting and enjoyable. Learning how to best manage your money and save on tax. What could be more fun? :D

    Once you get your head around it, it’s not to bad.
     
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  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    What about actually spending it!
     
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  19. Big A

    Big A Well-Known Member

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    Oh yes. Don’t worry I have a special talent for spending. Add a wife and two kids and trust me we have no problem spending it.

    Trying to rein in the spending for a little while anyway.
     
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  20. Macchiato

    Macchiato New Member

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    Thank you all for the info above.

    Like Ross points out, there are proposed DIV7A loan changes. From what I gather, the interest only 7 year and interest only 25 year loans would be replaced by one 10 year loan. This proposed loan would require interest at a higher small business rate. The new loan would also require principal repayments each year of the amount/10.

    Wouldn't this make lending from a bucket to the trust to invest unwieldy? Wouldn't the trust need the cash on hand to make these P&I repayments, and consider the liquidity/duration of investments its makes?
     
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