What are the ways to delay Trust distributions?

My understanding is that, all income needs to be distributed in the same financial year.
Just wondering how we can postpone trust distributions to go into next financial year?
Can we buy shares (or term deposit) in the Trust's name and then later sell it when ever we need to money to be distributed?
 
My understanding is that, all income needs to be distributed in the same financial year.
Just wondering how we can postpone trust distributions to go into next financial year?
Can we buy shares (or term deposit) in the Trust's name and then later sell it when ever we need to money to be distributed?


ha ha. You are confusing capital costs with income. If you had income in a financial year and you bought shares what would happen?

Read your trust deed, the trustee may have the power to accumulate income. But the trustee would be taxed on the top marginal rate.

Another way may be to distribute to a company (after making sure it is a beneficiary) which will then pay tax at 30%. The company can retain this money and later pay it out to shareholds as a franked dividend. However this raises new issues which need to be considered.
 
You don't have to distribute all income in the financial year but you will get taxed at 47% if you don't. What some people do is they set up a 'bucket company' to distribute excess profits too so that the maximum tax paid is 30% on the distributions.
 
What is the income of the trust estate for the tax year ?? Get that wrong and it wont matter. Generally speaking if trust income is not distributed by way of entitlement (not payment), the income is assessed to the Trustee at the default highest marginal tax rate. There are ways to defer. Consulting the deed and the class of potential beneficiaries is imperative. (But before 30 June in most cases)

Many people assume distribute means pay. Not true. At the very worst a trust entitlement may be paid not later than the date the tax return is due to support a distribution made.. So the key issues relate to entitlement and also payment.

Advice will assist and is critical.
 
You don't have to distribute all income in the financial year but you will get taxed at 47% if you don't. What some people do is they set up a 'bucket company' to distribute excess profits too so that the maximum tax paid is 30% on the distributions.

And what is the extra tax paid by the recipient ?? Up to 28%... Hence a final rate of 58% or more....I wont do the maths. Maximum tax rate is MUCH higher than 60%.

A bucket company approach generally = more tax. Its the dumbo scheme for dumbo accountants to suggests to even dumber clients. Or its Part IVA.....

Ever applied for a private ruling on a bucket company scheme ?? Nobody has successfully.
 
ha ha. You are confusing capital costs with income. If you had income in a financial year and you bought shares what would happen?
I guess I was. I thought I could use the income to buy the shares (capital cost) hence there is nothing left to distribute.
 
I'm not sure. Distribution is what we tell the ATO how the income is distribution between beneficiaries. Payment is what we actually pay to beneficiaries. Right?

Yes and no....A trust makes beneficiaries entitled to a share of trust income by following the trust deed, trust law and the terms of the deed. The beneficiaries may be paid their entitlement later. If the rtsutee doesnt distribute correctly the ATO will allege that the distribution wasnt effcetive and tax the trustee AND the beneficiary you nominated......And you will then appeal unsuccessfully etc.

Entitlements can be paid or discharged or held on sub-trust and dealt with in other ways. The ATO are eager to find trustee errors and penalise. What do the trust minutes / resolutions say?? Are they valid ??
 
And what is the extra tax paid by the recipient ?? Up to 28%... Hence a final rate of 58% or more....I wont do the maths. Maximum tax rate is MUCH higher than 60%.

A bucket company approach generally = more tax. Its the dumbo scheme for dumbo accountants to suggests to even dumber clients. Or its Part IVA.....

I thought if the recipient's max tax rate higher then the recipient has to pay the difference. Otherwise the recipient would get the franking credit. Is it a dumb understanding? :)
 
Can you please expand on this state?

Lets assume a trust with just $100 of trust income. Its a $100 FF div....Received in cash from BHP.

Tell me what the $ value that the trustee must distribute? Is it

1. $100
2. $130
3. $142.85
4. Nil ...The trust made a loss after allowing for the prior year tax agent fee ?


If you get it wrong then is the trust distribution effective or could the trustee be taxed ???

What did the trust minutes before 30 June say ?? If they got it wrong what may the impact be ???











Answer : 3. may be correct but 4. may prevail. However if a non-resident beneficiary is nominated is the answer the same ?
 
Is loaning from a 'bucket Trust' is simpler than loaning from a 'bucket company'?

This won't solve your problem as the 'bucket' trust will still hve income.

Imagine you earn $50,000 and then lend me $50,000. You will still have to pay tax on your income of $50k. One doesn't cancel out the other.
 
The trustee must make the beneficiary 'presently entitled' to the payment for the distribution to be effective. This doesn't necessarly mean the payment has to be made, but that the money belongs to the beneficiary - who can then call on the trustee to make payment/demand payment at anytime.

The money is essentially a loan from the beneficiary to the trustee until it is paid.

Some trustees have gotten into trouble by making 'distributions' to children of the family but not actually making payment. Children usually grow up after a few years and after they become 18 someone may whisper in their ears that the trustee has been distributing all this money to you but you haven't been paid - $416 per year for 18 years maybe. They then call on uncle Harry, who they never liked anyway, to make payment of they will sue Harry as trustee.

Death is another one that catches people out. At death the executor must call in all the loans to the deceased. Sometimes large sums of money is owed and the trust doesn't have the cash laying around. Executor ends up suing the trustee and seizing property.

Unpaid present entitlements.
 
And what is the extra tax paid by the recipient ?? Up to 28%... Hence a final rate of 58% or more....I wont do the maths. Maximum tax rate is MUCH higher than 60%.

A bucket company approach generally = more tax. Its the dumbo scheme for dumbo accountants to suggests to even dumber clients. Or its Part IVA.....

Ever applied for a private ruling on a bucket company scheme ?? Nobody has successfully.

I understand where you coming from and as a general rule you are correct.

Truth is 90% of accountants cant comprehend themselves the complexity of Div7A and all the pitfalls of it haha..

You are correct in the sense that it is senseless to distribute to a bucked to save a few cents now and cause Div 7A issues etc for the next 7 years.

But when you have clients maxing out at $180K at the individual level, losses in all other structures utilised then a bucket company option is a smart approach.

By this I mean (and im sure you are aware) that funds have to be paid at the end of the term (7 years) so it comes down to a strong business/property wealth creation strategy whereby funds can be utilised (cash) at the end of this term to physically pay the loan/div 7a balance.
Most accountants get stuck even prior to this, but past this point there needs to be an additional strategy in place to then put the cash funds to use etc.

I get clients asking me to use their bucket company the last accounting firm set up for them but in 90% of cases I am against it the client is not large enough to justify the increase in acc work, fees and complexity as you are creating a nightmare if not managed properly with a defined exit strategy for it.

Gone are the days of "throw it to the bucket company" trick..
 
And if you tell them that a large super contribution (or two with a spouse) can lower the marginal rate to 15% they argue they don't want it in super. Five years later they have missed $350K of potential accumulated savings.

Personally I reckon face the tax personally and take the income and smash a large neg gearing loss or super (if eligible) to offset it is smarter.

I see bucket companies up there with forestry schemes etc. There are some strategies but they provide little for the effort, cost and complexity. They don't have a payoff. ...I have never seen a bucket company with $XXX,000K + of cash savings....If it did I would change my view.
 
Another way may be to distribute to a company (after making sure it is a beneficiary) which will then pay tax at 30%. The company can retain this money and later pay it out to shareholds as a franked dividend. However this raises new issues which need to be considered.

Can you elaborate on that more??? What issues?:confused:
Thanks...
 
I referred to the main issue....More tax. The shareholder is taxed on the FF div. The shareholder then pays more tax less the credit for company franking credits.

Final effective tax rate up around 58%. That's worse than just facing the tax at 49%.

Someone is sure to now say - That's the worst case. It can be less. Yes it can. If the div is smaller. So that approach is self defeating. The larger the amount of the div the bigger the tax cost. The more someone earns the more they want a bucket co the bigger the later issues.
 
I referred to the main issue....More tax. The shareholder is taxed on the FF div. The shareholder then pays more tax less the credit for company franking credits.

Final effective tax rate up around 58%. That's worse than just facing the tax at 49%.

Someone is sure to now say - That's the worst case. It can be less. Yes it can. If the div is smaller. So that approach is self defeating. The larger the amount of the div the bigger the tax cost. The more someone earns the more they want a bucket co the bigger the later issues.

But all that assumes your individual income or circumstances don't change, what if they do, where you are approaching retirement and you no longer derive high income (or you earn more being self-employed), wouldn't this be beneficial?
 
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