What to do with Bucket Company income?

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

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The 7 year loans are for unsecured and 25 for secured but both would need to be PI on the current laws. This makes it difficult to navigate but not impossible.

    I am not sure what the new laws will look like but it will be an improvement by the sound of it.
     
  2. Elives

    Elives Well-Known Member

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    my understanding is it's like 8.6% p.a approx now and you have only 10 years for secured loans, is that also p&i? or io? is there still a benefit from using cash in bucket companies for deposits etc?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Benchmark rate is published on the ATO website. It's about 5.3% now I think.

    You could borrow deposits for IP from bucket company and later borrow more to repay company
     
  4. Elives

    Elives Well-Known Member

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    oh 5.3% isn't bad i saw on article it was 8.6% / 3% above home loans.
     
  5. JasonC

    JasonC Well-Known Member

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    Maybe one of the accountants/tax advisors can chime in, but my understanding is that the payments could be done on paper - Ie. Declare a dividend from the bucket company to the trust that is the exact same amount as the required P&I repayments. No cash flow needed but tax will need to be paid.

    Regards,

    Jason
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There are 3 ways basically.
    1. Paid and borrowed back under a loan agreement
    2. Unpaid present entitlement not paid but must be put on a loan agreement
    3. Sub trust where the trust holds amount the company is entitled on on a bare trust for that company
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The loan is to....a individual. Assuming the trust is the sole shareholder the div is paid to trust not the borrowers loan. Trust income increases, trust has to distribute (more) to the borrower who applies this to the loan repayment who also faces shortfall tax on this as a minimum repayment under a complying D7a loan.
    .
    Franking credits means....Family trust election and interposed entity election .....

    The franked dividend strategy is a deferral mechanism but does add to the total final cost. Depending on marginal rates it becomes 58% ish. Its benefit is deferral. But its a costly true rate of interest etc
     
  8. Elives

    Elives Well-Known Member

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    if you've loaned money from the bucket company as an individual for a investment expense why are you unable to claim the interest portion to the bucket company on your individual tax return? or did i misunderstand?
     
    Last edited: 1st Jul, 2020
  9. Elives

    Elives Well-Known Member

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    my understanding is you can do this year on year as long as you transfer/pay back the full amount to the bucket company before lodgement, so no div7 loan is required?
     
    Last edited: 1st Jul, 2020
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No, this is not correct.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If you borrow money to invest in income producing assets the interest could be deductible.
     
  12. Elives

    Elives Well-Known Member

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  13. Elives

    Elives Well-Known Member

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    i literally got off the phone today from lady from ato about div7 loans and i asked her about wanting to be able to take money from trust business account pay direct to bucket company bank account and then to personal offset account on a weekly basis as business income comes in and transfer to personal offset account and at end of year transfer/pay back in full total amount to bucket company she said as long as you keep a ledger (bank statements of that bucket company deposits/credits) and pay back in full before lodgement / within that financial year then you wouldn't need to do a loan agreement and that was perfectly fine :s
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    she either doesn't know the law or misinterpreted what you were saying.
    Put in for a private binding ruling to find for sure.
    Have a read of s109 onwards of the ITAA36. from memory it might be s109R that prevents this.
     
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  15. Elives

    Elives Well-Known Member

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    upload_2020-7-9_20-6-31.png

    i have another question relating to bucket companies, i hear people often say you can use the money to fund deposits and closing costs for ip purchases but on the ato site it says that for secured loan it has to be 110% equity already in it etc 1m purchase price 220k equity already and then you're able to loan 200k from bucket company on 25 year term. how do people loan from bucket for ip deposits?

    Cheers, Elives
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Unsecured loans also possible
     
  17. Elives

    Elives Well-Known Member

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    if my above statement is correct, then there really seems no point of using the secured loans from bucket company as a option as by the time you have equity in the property you could just pull equity out / refinance from a bank. and use your bucket money cash for higher returns.

    so am i correct in thinking the only way to fund the deposit / closing costs is via a unsecured loan max term 7 years? after year 2 of loan can you refinance and create a new 7 year loan? as repaymnts would be high.

    Cheers, Elives
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You could refinance with a bank but not just keep extending your loan
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A div 7a loan with P&I over 7 years will smash you on servicing if a lender identifies it. Sometimes its fine for a year or two and then refinance from equity etc. Can be a debt recycle strategy provided the original D7A $$$ is used to acquire. Its a terrific strategy for short term deposit finance