Use of bucket companies after TR2010/3

[Welcome]

http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20103/NAT/ATO'&PiT=99991231235958

In planning for EOFY... just trying to sort out what to do with some suplus income. What are the experts opinions on using bucket companies after TR2010/3?

Basically trying to find a way to:

a) pay 30% max tax on income
b) have access to the funds wihtout being stuck in co
c) doing everything legit without penalty / future problems
d) keep the paper / money trail as simple as possible to reduce acct fees

Are there ways we can still do this using bucket companies? Eg can we pay the distribution to the company, and then loan (at commerical rates) the capital to another entitiy for investment purposes and:

a) report the interest as income to the bucket co
b) claim a deduction in other entity (if used for $$$ income generating purposes)

Or would you recommend just making the most of other family members 37% tax bracket and distributing some paper income to them without all the extra stuff around? Are their other options I am overlooking?

Thanks

Of course I will seek my own advice from my acct.... just trying to get a bit more informed about possibilities and some of the issues before we talk about it.

 

[Mry]

With unpaid present entitlements to companies from trusts now being treated as loans, any distributions allocated to companies have to be repaid back to the trust over 7 years (or 25 years secured) with interest or the distribution has to be paid to the company in full, otherwise it becomes a deemed dividend.

It doesn't matter if you onloan the funds at commercial rates to other entities because the problem is the loan between the trust and the company.

I'd recommend you speak to your accountant. Proper checks need to be run and it can be messy.

 

[Terryw]

I don't think it is a problem. Just have the company enter into a commercial loan agreement with the trustee and transfer the money back and forth.

 

[Terryw]

You should also consider the asset protection aspects of distributing to a bucket company - who owns the shares?

 

[Welcome]

I don't think it is a problem. Just have the company enter into a commercial loan agreement with the trustee and transfer the money back and forth.

Leaning towards this option. Are there any other downsides if I go down this path? eg does it need to be repaid in certain amount of time or that is all dependant on a loan agreement?

From a lending POV for any of the MB out there.... that commercial loan would then need to show up as a liability on the trusts balance sheet, would this effect the trust (guarantours) servicability? Even if the interest is essentially being paid to a related enitity? Or I guess the loan would also show up as asset on the bucket co balance sheet so would it have net zero effect from lenders POV?

(Again I will seek my own professional advice for my situation... just trying to get educated)

You should also consider the asset protection aspects of distributing to a bucket company - who owns the shares?

The bucket co has been setup with another disc trust and corp trustee as owner of the shares, as this will allow a bit more flexibility when having to get the dividends out.

 

[Terryw]

I think the terms of the loan will depend on whether security is used. if the loan is unsecured I thin the term is about 7 years, if real property us used as security then up to 30 years, from memory.

I guess you can just enter into new loan agreements once these loans have been repaid.

 

[Welcome]

And does the ATO require this loan to be repaid on paper only, or would they need physical payment.

Just thinking if the $$$ is non liquid at time the loan agreement is expiring if there are other create options...

Any MB out there who can comment on this from a lenders perspective please?

 

[Mry]

The problem under the new definition according to TR 2010/3 is that you have to enter loan agreements if you want to use the money that you say you are borrowing from the company. In the past it was ok, it wasn't a "loan", it was an Unpaid Present Entitlement and unless you breached Subdivision EA where you advance money to another beneficiary in excess of what they were entitled to which made each year a balancing act.

Using a bucket company now is a short term benefit strategy leading up to long term problems.

Say I made $200,000 a year in my trust and I give $100,000 a year to a bucket company, and then make a complying loan agreement under Division 7A to borrow back those funds. The next year I start paying interest back to the company ($5,735) which creates a tax payable in the company and entitles it to more of the funds I have in addition to refunding the principal ($12,052) from the borrowed funds. Within 7 years, I have repaid the entire loan and the company has earned roughly $18,000 in interest, interest it pays tax on. If I used the proceeds of the borrowed funds for income producing purposes I can claim a deduction but in my experience most of those funds are used for personal expenses. So here we are in seven years, worse off as the funds have been repaid, plus the interest as well which I have paid over and above the principal, I don't get a deduction for the interest but I pay tax on it in the company.

Lets say I continually draw down all of the funds and continually borrow the money each year with new loans for whatever is in the company's account. At the end of 10 years, the repayments required and the interest charged will snowball leading to very large tax bills in the company (about $80k in interest at least), and the company being entitled to most of your personal funds. Your accountant's hair is falling out having to track each loan according to the year it was made, calculating interest and minimum principal loan repayments and allocating deposits against one of seven loans.

There are statutory requirements for the loans with regards to minimum interest rates, loan repayment terms and actual minimum repayments to avoid having the whole loan treated as a deemed dividend.

If you want more info, you can play with the Div 7A calculator on the ATO website
http://www.ato.gov.au/taxprofessionals/menulink.aspx?42876
Or get a better overview here.
http://www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/40223.htm&page=1&H1

 

[Welcome]

Thanks for that picture Mry.

It makes the 38% tax bracket look very appealing for easy, paperwork free, use of those funds.

Thanks

 

[Global G]

Hi,

A UPE will not be considered to be a loan to which Division 7A applies if the funds representing the UPE are held on sub-trust for the sole benefit of the private company beneficiary.

Don't use a DIV7A loan agreement to loan the excess trust profit back to the trust (as working capital), instead setup a "sub trust" account on the books of the main trust and loan the money back from Bucket Company as a IO loan over 7 years or 10 years. This way you're not paying off a PI loan and makes life a lot easier.

You only have to pay the interest on the loan from the Bucket Company once a year, and the trust gets a full deduction for this anyhow. Be aware you will have to pay whole amount original loaned back on the seventh/tenth year.

If you make the shareholder of the Bucket Company another discretionary trust then you can pass franking credits to whoever you want, whenever you need too, as long the shareholder trust does not have a loss.

Example of Trading Trust/ Sub Trust/ Bucket Company/ Property trust combo :

Husband is director of "Main Risky Family Trading Trust" trustee and wife is director of "Bucket Company" and "Investment Property Family Trust" trustee.

"Main Risky Family Trading Trust" makes a profit of $400K, benefactor 1 gets $105K, benefactor 2 gets $105K and the rest if distributed to the Bucket Company $190K.

"Bucket Company" loans money back to "Risky Trading Family Trust" and that "Risky Trading Trust" opens a sub trust account on its books with a IO loan payable in 7 years in full (the principle can be paid anytime in that time).

Shareholder of the bucket company is "Investment Property Family Trust", which has a investment property negative geared with a loss of $10,000 dollars.

The "Bucket Company" dividend $7006 dollars with a franking credit of $3003, thus the property trust makes a profit for the year of ($6) and any benefactor of this trust can get the $6 profit as well as a $3003 franking credit with the ATO, streamed to them.

The bucket company gets its income from the payment of interest on the IO loan from "Trading Trust" or if further amount is required because of lots of cash flow is needed to service loans in "Investment Property Family Trust", then some of the principle amount of the loan to "Trading Trust" can be paid back to Bucket Company and paid into "Investment Property Family Trust" as dividend as needed through the year.

The Bucket Company and "Investment Property Family Trust", (as far as I'm aware) will have to have a family group election to be able to stream the franking credits, and this will restrict who you can distribute to, however you still have your "Trading Trust" that is not a part of the group who can distribute to whoever is in the deed.

Here is latest from ATO, about UPE's:-

http://law.ato.gov.au/atolaw/view.htm?Docid=PSR/PS20104/NAT/ATO/00001

Hopes this helps you.

Regards Global G

 

[woohoo]

Whats the benefit of setting up that bucket company? Basically you set it up so that you give yourself a loan, and pay interest to yourself. But the interest you get from yourself you are paying tax on it, and the interest you paid is tax deductible.

 

[Rob G.]

Whats the benefit of setting up that bucket company? Basically you set it up so that you give yourself a loan, and pay interest to yourself. But the interest you get from yourself you are paying tax on it, and the interest you paid is tax deductible.

Exactly.

You have lost the ability to treat the company UPEs as de facto "retained earnings" which can be reinvested for the common good of the trust. A valuable source of funding.

Cheers,

Rob