Tax Tip 111: Getting money out of a Bucket Company

When lending money to a related company (perhaps for startup costs), does the terms of the loan agreement need to be Div7a compliant such as meeting the benchmark rate set by the ATO or adhering to the maximum loan term?

 

Depends. Who is lending,?

 

No Div7A only applies to borrowing from a company or sometimes a trust. Not when lending

 

Company A with shares held in individuals name lending to Company B with shares held by a discretionary trust.

 

Div7A doesn’t apply to companies to companies where not acting as trustee

 

I am new to the concept of a bucket company, but I am thinking it might be an option for me. I recently increased my salaried income from $150,000 to $400,000. As a result, I have been brainstorming ideas on how to minimize my tax by deferring tax liability into the future when my marginal tax rate is lower.

One option I am considering is to become a contractor and invoice my current employer for $400,000 per year. If I understand correctly, a sole trader cannot act as a bucket company. I would need to pass the income to a second company or trust. Is that correct?

However, what if I set up a small business company (PTY LTD) that invoices my client? Could this PTY LTD company act as the bucket company as well? Could it collect the income, or should the income be passed to a second company/trust?

Any advice and guidance on this would be much appreciated. Thank you!

 

Look at the PSI rules

 

damn. so there is no chance of deferring tax liability if your income falls under the PSI rules?

 

Its also a potential employer breach of the Fair Work Act to engage in the arrangement. As a employee you may lose entrenched benefits and expose yourself to issues of concern eg redundancy is foregone etc Withholding tax applies to PSI income in any event. And the need for single touch payroll and reporting. The apparent benefits usually arent quite as beneficial.

PSI cant be deferred to a future tax period. Generally the PSI rules require the company to make no profit and to attribute its profit as salalry and wages (subject to withholding, super etc) at 30 June at least. If there is the one contracting company its almost certainly PSI resuting from your efforts and exertions.

 

no

 

Most people think you can claim more and delay tax and other matters if you contract. Its just not true. Tax laws limits deductions to the same as a employee (+ entity maintenance costs like insuarnce etc). You lose statutory entitlements. (eg redundancy, sick leave paid annual leave etc and unless you adjust your pay rates for this you may be worse off.) and create a admin chore. . Then need to report and manage own payroll and tax withholding and super. AT BEST you can delay some tax a bit but its nothing substantial. And for the effort and costs hardly worthwhile. One of the biggest risks is failure to withhold from PAYG salary. The penalty for failure to withhold is 100% of the amount that should have been withheld eg shortfall + interest. Its designed to limit games.

 

Many people think you can just resign from your job and come back the next day and get paid through a trust or company to do the same thing and then income split it with the spouse and/or hold in the company

 

Well you can...but should you? Depends how you like to sleep

 

I once encountered an IT person, recent immigrant, set up a company and got his employer to just deposit into his company account and then he split the income with his wife. I told him he couldn’t legally do that and he didn’t believe me

 

Old tax law before PSI which goes back 20+ yrs. Income alienation ...and a scheme. Likely to attract the worst penalties. ATO would throw that AND not amend spouse arguing they cant amend a self assessed return.

And thenn tax adviser penalties

 

Hi Paul,

If, for example, an IT professional subcontracts via a company, and the income is considered PSI and is attributed to the individual - are there any super and withholding obligations with respect to this attributed amount?

It seems like the answer is yes with regard to withholding, but doesn't seem practical as net PSI would likely be calculated at tax time.

 

Yes. A company is obliged to insure its workers under state law, and to pay super guarantee. And withholding obligations are unchanged by the arrangement. And single touch payroll (STP) reporting. If anything the employee is likley to be a closely held person. The rules allow payg summary finalisation later than arms length employees.

The key issues is the attributed element of PSI. This can be done through payroll prior to STP finalisation or adjusted in the company return. The STP basis is easier. This part could be deferred to 30 June but can also be fixed aftre 30 June. But withholding still applies and that requires 21 days aftre end of quarter usually. Can also be amended.

Statutory obligations are statutory obligations. Could also be FBT issues. I encountered someone in the past 2 years whose tax adviser ignored all that. The unreported PAYGW was tens of thousands and could be the amount of a penalty. They missed out on cashflow boost. I resolved the issues and applied. ATO did query it but agreed that attribution is a legal obligation and withholding also applied. So a backdated application was approved. They got $60K tax free as a result. No bad for a few thousand of my time and advice.

 

If a bucket company has $1million, and you want to buy a house to live in. Instead of thinking of dividends or loans to the individual, could we discuss with a 3rd party bank?

The scenario would be:

Secure a bank loan of $1million by offering the $1million inside the bucket company as security/collateral for the loan. I would also assume that this would be a more secure collateral for the bank than a house, as the security is cash itself and very liquid. It would be less risky of a loan for the bank and could negotiate a lower interest rate than the market rate?

I have read about the Domino's CEO using his shares in Domino as collateral for bank loans for private use, or Mark Zuckerberg getting $100m loans from banks by using his Facebook shares as security. So, on a smaller scale couldn't we use cash inside a bucket company as security for a bank loan?

 

So the company cash would be security for a loan with the individual as a borrower? Lots of legal and tax issues with that. It would trigger a deemed dividend for starters

 

Yes, say the company has only 1 sole director (the individual), and puts the company cash of $1m into a special bank deposit of some sort as security for a loan with the individual (that sole director) as the borrower. The company is not transferring out any funds to any other entity, the cash stays in the company. The cash is simply used as collateral. How would that be treated as a deemed dividend?

I’ve come across a concept on google called a deposit under lien, not sure if that’s something entirely different.