Bucket Company for Family Trust

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  • Bucket Company for Family Trust

How do I build a ‘bucket company’ for my Family Trust?

This bucket company becomes a beneficiary of your Family Trust This is automatic under most Family Trust deeds.

As soon as you build the bucket company you can start distributing income from the family trust to this new corporate beneficiary.

Can I get a bucket company many years after I started the Family Trust?

You can build the bucket company many years after you got the Family Trust deed. It does not matter. The bucket company automatically becomes a beneficiary under your family trust.

Why is my company automatically a beneficiary of my family trust?

Family Trusts have beneficiaries. Family trusts have ‘classes’ of beneficiaries. And these classes are  often ‘open’.

Example of how ‘open’ classes of family trust beneficiaries work:
  • I get married. My spouse automatically becomes a beneficiary of my Family Trust.
  • When I have children my children automatically become beneficiaries of the Family Trust.
  • My children have children. My grandchildren automatically become beneficiaries of my Family Trust.
  • When I get an interest, shareholding or directorship in a company then that company becomes a beneficiary of my Family Trust:
      • Any company I have an interest in becomes a beneficiary of my Family Trust.
      • Any company I own shares in becomes a beneficiary of my Family Trust.
      • Any company I am a director of becomes a beneficiary of my Family Trust.

This is because the Family Trust has ‘classes’ of ‘beneficiaries’. And these classes are ‘open’. 

Why do Family Trusts allow beneficiaries to be added?

The more beneficiaries you have in a Family Trust the better.

If you could make every person on the planet a beneficiary then you would do that. But the Australian Tax Office claims you are not able to do this. This is because the beneficiaries are not ‘certain’ or ‘ascertainable’.

In the 1990s a client instructed us to prepare a Family Trust Deed and staple the Melbourne White Pages to the family trust deed. We applied for a Private Ruling. But the ATO stated that the ‘classes’ of beneficiaries were uncertain and unascertainable. (The “White Pages” were very thick books. They were delivered free to your home. They had a list of people and their telephone numbers.)

I think you get the point. The more beneficiaries in your Family Trust the better.

Q: But if you have evil people and strangers in the Family Trust cannot they ask for money?

A: No. Most Family Trusts have over 400,000 beneficiaries. Beneficiaries have not right to income. The Trustee is instructed by the Appointor on who gets income. This is mostly to yourself, spouse, children, grandchildren, parents and a company you control. (We call this a “Bucket Company” or “Corporate Beneficiary”.)

What is the definition of a ‘beneficiary’ in a Family Trust?

The definition of beneficiaries generally includes ‘my spouse, children, grandchildren, great grandchildren and any company I have an interest in, from time to time‘.

So generally any company you have an interest in is also a beneficiary under your Family Trust.

Interestingly, if you have a share in say, Rio Tinto, and if Rio Tinto has 300,000 beneficiaries, then all 300,000 beneficiaries are also beneficiaries of your family trust!

So pretty much any company you have an interest in is a beneficiary of your family trust.

(Obviously, a “Special Purpose Company“, while also a beneficiary of your family trust, can not be used as a bucket company. This is because a Special Purpose Company can only do one job. This is to be a trustee of your Self-Managed Superannuation Fund.)

Example of a definition of “Beneficiaries” in a Family Trust deed

This is the Legal Consolidated definition of a Beneficiary in our Family Trust Deed: 

Beneficiary (but never the Settlor):

      • as at the Commencement Date the Default Beneficiaries, Trustee, Appointor and Back up Appointors;
      • any entity, subsidiary, parent company, company and association (whether incorporated or not) that has an interest in, related to, Associate, or Associated Entity in any of the Default Beneficiaries, Trustee, Appointor and Back up Appointors and each of their directors, members, employers, employees, contractors, independent contractors (and in all cases including whether equitable and legal, whether vested, expectant or contingent);
      • charities and charities listed by the Australian Charities and Not-for-profits Commission from time to time; and
      • schools, universities, colleges and other educational bodies of any kind, private and otherwise, either within or outside Australia from time to time.

(Each referred to as Persons)

Plus, for each of the Persons the following classes:

      • any Spouse, Children, Grandchildren, Great grandchildren, parent, grandparent, sibling, uncle, aunt, niece, nephew;
      • any entity of which the Person is a director, trustee or partner;
      • any entity in which the Person has a legal or equitable interest (whether vested, expectant or contingent);
      • any entity for which the Person is a Beneficiary or potential Beneficiary (whether vested, expectant or contingent);
      • any entity who is the personal representative of the Person;
      • any entity employed by or employs the Persons;
      • any charitable, religious or community organisation, group or association of which the person is a member, participant or benefactor;
      • any entity who would be or could possibly be an Associate or Associated Entity of that Persons; and
      • any entity or classes nominated by the Trustee from time to time (at the Appointor’s direction).

The classes are open to include an entity that has not yet come into existence or a class not yet identified.

The term ‘entity’ in this definition, also includes natural persons, companies, trusts, associations, groups and entities.

Child, Children, Grandchildren and Great-grandchildren include stepchildren, illegitimate children, defacto children and legally adopted children and children that are adopted out, from time to time.

To see the complete definition of “Beneficiaries” open the “Sample” of a Family Trust deed.

You can see that the definition of beneficiaries is as inclusive as possible. And the definition seeks to have as many classes of beneficiaries as ‘open’ as possible.

Family Trusts go on for 80 years, or forever in South Australia. Therefore, over time, you and your spouse will die. And your children and their spouses and their children continue as beneficiaries of your Family Trust.

The young man builds his family trust. He has no wife or children. He then marries. He has children and grandchildren. He dies of old age. Conveniently and automatically these ‘new’ family members are beneficiaries of his Family Trust.

Why is a corporate beneficiary called a ‘bucket company’ in a family trust?

A company that you distribute family trust income has many names. For example:

  • corporate beneficiary
  • company beneficiary
  • bucket company – before Division 7A, once you used up your human beneficiaries’ low marginal tax rates ‘you then tip the rest of the income into the bucket company’

Tax advantages of a corporate beneficiary in a Family Trust

Your Family Trust distributes to human beneficiaries first.

This is mum, dad and the children.

This is to use up their low marginal tax rates.

What happens after the Family Trust runs out of beneficiaries on low marginal tax rates?

When there is no one left on low marginally tax rates then the family trust pours the rest of the income into the ‘bucket’ company. The company gets whatever income is left to be distributed.

Unlike humans, companies pay a fixed percentage rate of tax. Whether the company gets $10,000 or $100,000 in trust income it pays the same percentage tax rate.

However, with a bucket company make sure you also have a Division 7A Deed.

But a Bucket company has 5 challenges

As with everything you do there are challenges. These are the 5 issues with a bucket company:

1. Pay the income physically into the bucket company’s bank account

So you decide to distribute Family Trust income to the bucket company.

You must now do two things:

  1. you complete a Family Trust distribution statement; and
  2. then physically transfer the money into the bucket company’s bank account. This is before lodging the tax return.

You, therefore, need to have the actual cash in the Family Trust bank account. But rarely does a Family Trust have such ‘lazy money’ sitting cash.

So if there is not enough cash you need a Division 7A Loan.

2. Division 7A Loan Deed for a Bucket company

When a trust or a human owes money to a company then you need a Division 7A Loan Deed.

When a Family Trust fails to pay all the income to the bucket company then you need a Div 7A Loan Deed. The Div 7A loan agreement is a loan between:

  • the family trust that is distributing the income; – but actually does not physically pay the income; and
  • the bucket company that has not actually been paid the Family Trust distribution income

If the family trust doesn’t pay all the distributions in cash before the tax return is lodged, then a Div 7A loan is required.

A Div 7A loan:

  • Has a maximum term of 7 years
  • Has a minimum annual repayment plan
  • Has interest that is payable at a rate set by the government each financial year
  • The minimum repayments can be met by the Family Trust physically making payment to the bucket company each year. However, it is possible for the bucket company to declare dividends that are off-set against the minimum repayment obligation.

3. Hard to get money out of a bucket company

Money is ‘trapped’ in a company. This includes a bucket company.

As can be seen above with Div 7A you cannot just take money out of a company.

One way to get money out of the company is to pay a dividend to the shareholder of the bucket company. The dividend is already taxed at the company tax rate. Therefore, the shareholder gets a (franking) credit on the tax already paid.

Example of a bucket company distribution:

The bucket company paid tax on the income many years ago at 30%. The imputation or franking credit is, therefore, 30%. The company declares a dividend to mum. Mum’s tax rate is 47%. But the bucket company has already paid 30%. So mum just pays the difference. This is 17%. So mum just pays 17% on the dividend from the bucket company.

Mum is now retired. If mum has not much income because she is now retired then she can, over time, drip feed dividends into her name. This is with a potential tax rate of zero. And the government gives you back to the franking credit.

4. Who owns the shares in the bucket company?

As we saw above, the wealth of a company is trapped.

A common way to get money out of the bucket company is to declare a dividend. But only shareholders can get a dividend.

There are also asset protection issues.

Commonly, you follow the ‘man of straw and woman of substance’ asset protection strategy.

Dad runs the business and is at risk. Mum does not take on the risk of the business. Mum therefore holds all the good assets. This includes shares in a  company. Therefore, Mum holds the shares in the bucket company.

Alternatively set up yet another separate Family Trust. This is to hold the shares of the bucket company. 

But you need to think long and hard. Every company and trust you set up has to be looked after. There are more accounting fees each year. And a Family Trust deed needs to be update every 5 – 7 years.

Another trust is another mouth to feed.

5. What do you do with the money in the bucket company?

You saved tax by distributing money to a bucket company. Congratulations. But now you have a pile of cash sitting in the bucket company.

Cash from the Family Trust that is now in the bucket company needs to be invested.

The bucket company is now an investment company. It seeks to generate an income source for the shareholder. 

But a company is not a good vehicle to hold ‘appreciating’ assets.

When mum, dad and a trust sell an asset they reduce the capital gain by 50%. This is when they hold that asset for over 12 months. This is one of the reasons why you set up the Family Trust in the first place.

But, sadly, companies do not get that capital gains tax break.

Can my corporate beneficiary do other jobs?

Yes. Your new bucket company can also perform other duties. For example:

  1. corporate trustee of a family trust – but this is not recommended because a corporate trustee carries risk
  2. corporate trustee of a unit trust – but not recommended because of asset protection issues
  3. corporate trustee of Self-Managed Superannuation Fund – but not recommended as it is better to have a special purpose company
  4. corporate trustee of a Custodian Bare trust when an SMSF borrows money
  5. bare trustee: Acknowledgement of Trust – ‘AFTER the Trustee buys’
  6. bare trustee: Declaration of Trust BEFORE you buy – ‘secretly buy’
  7. bare trustee: Bare Trust Deed – ‘hide assets you own’
  8. crowd-sourced funding vehicle
  9. vehicle to operate a business in its own right (rather than through a trust) – but not recommended as it breaches best practice for asset protection

What does the corporate beneficiary do with all the money it gets from the Family Trust?

Q: My client has a family trust.

He now finds it hard to distribute excess trust income to his children. This is because the children are now working and have their own other income.

He is thinking of building a Legal Consolidated corporate beneficiary.

Legal Consolidated does do not recommend that an asset rich vehicle (‘safe house‘) like a company beneficiary be exposed to business risk. This is because if it can not pay its debts as they fall due it can be wound up. And all assets are lost to the liquidator. But can the corporate beneficiary carry on investment activities like trading stock and shares? And other passive investments?

A: A Legal Conoslidated corporate beneficiary of a family trust can do anything it wants. It can own and operate a business. It can hold property. And it can hold passive investments like shares.

Except for a Special Purpose Company being the trustee of a SMSF, all Legal Consolidated companies are prepared that way.

But best pratice for asset protection is to not let asset rich vechicles (e.g. non-working spouse, SMSF, bucket company) be exposed to risk.

But the bucket company gets richer each time the family trust distributes money into it. And you may not be happy to just keep the company’s money sitting in a bank account. You may want your company to put its money to work. 

A bucket company should try and limit its risk by investing in passive investments. We are not financial planners but there are other ‘passive’ investments, not just listed shares. Alternatively, let the asset rich bucket company lend money. And let the lender take the risk. 

If the bucket company is lending to:

I am about to update my Family Trust deed. Should I build the bucket company first?

Q: My client needs to update his Family Trust Deed. It is over 7 years old.

Should I incorporate the bucket company first? And then add it specifically in the updated Family Trust deed?

A: I would not recommend that fiddle around with the current list of beneficiaries already named in your Fmaily Trust. If add to the beneificiaries then you normally trigger a CGT and stamp duty events. Once the Family Trust is created you generally cannot add beneficiaries.

However, read the above information. Most Family Trust have ‘open classes’. This usually includes ‘any interest I have in a company from time to time’.

How to choose a name for your new Family Trust bucket company

As you build your corporate beneficiary company on our website, check if your preferred company name is available.

Restricted words and expressions in an Australian company:

‘bank’
‘trust’
‘royal’
‘incorporated’

You cannot use words that could mislead people about a company’s activities. This includes links to the Government, the Royal Family, or ex-service groups.

ASIC also refuses offensive and illegal names.

Australian Company Name Abbreviations for a bucket company:

  • and: &
  • Australian Business Number: ABN
  • Company: CoCoy
  • Proprietary: Pty
  • Limited: Ltd
  • Australian: Aust
  • Proprietary Limited: Pty Ltd

Your Bucket company Constitution contains:crowd source funding Pty Ltd compliant company constitution

* Adj Professor, Dr Brett Davies’ Doctorate is on business succession planning, our pre-emptive rights are cutting edge
* ‘tag along’ requirement forcing minority shareholders to also sell their shares together with majority shareholders
* accountant friendly, GAAP compliant valuation powers
* profit distributions, even when there is no ‘profit’ for ATO purposes
* over 30 different classes of shares – see the sample. And you can add to the classes of shares at any time
* allowing Directors and shareholders to use Zoom and other online facilities
* built-in Division 7A Loan Deeds

“Pty Ltd” is an abbreviation for “Proprietary Limited”

  • Proprietary‘ means the company is privately held.
  • Limited‘ means the liability of the shareholders to pay the debts of the company is limited. This is called ‘limited liability‘. See here for asset protection.

Minimum requirements for a bucket company:

  • at least one director/secretary living in Australia (for asset protection best to have only one director)
  • a physical Australian address for the registered office
  • at least one shareholder (this should be a ‘safe harbour’ person – the ‘person of substance‘ rather than the ‘person of straw’)

Seven advantages of using a law firm to incorporate a bucket company

The 7 advantages of using Legal Consolidated:

  1. 94% of  bucket company incorporations happen within 25 minutes of you building the company online
  2. when required, we contact ASIC to confirm your company name, at no charge
  3. what if your company name is unavailable or challenged by ASIC? We contact you and help you find one that is available
  4. you receive a secure, personalised email containing:
    • Certificate of Incorporation
    • Company Constitution
    • All minutes
    • Letter on our law firm’s letterhead confirming we prepared and are responsible for the company’s incorporation
  5. our hints and training videos guide you. The law firm is available for legal advice on how to build your bucket company
  6. the bucket company constitution is a deed. Only a law firm can legally prepare deeds.

Australian company tax rates for a bucket company

  • A company pays tax at a fixed rate.
  • In contrast, a human being pays tax at different marginal tax rates. The more the human earns the higher the tax rate.

Your bucket company (flat) tax rate depends on whether the company is a base rate entity.

From 2021 there is a 5% difference.

ATO tax rates for a bucket company

The maximum rate that a corporate beneficiary can use to frank dividends is its corporate tax rate for imputation purposes. It is worked out based on the bucket company’s position in the previous year. It is either:

  • the current year Low Rate; or
  • the High Rate based on the prior year’s levels of aggregated turnover, base rate passive income and assessable income.

If the bucket company is set up in the current year then the maximum franking rate is the Low Rate for the current year.

For more information on Australian companies:

Constitution allows for digital signatures
Can an Australian company, itself, give a Power of Attorney?
Maintaining a company register
Do Australian company Minutes require a wet signature

 


Legal Consolidated Barristers & Solicitors Australia Brett Davies

Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm

National:   1800 141 612
Mobile:      0477 796 959
Email:       [email protected]


24/08/2021

Bucket Company for Family Trust

How do I build a ‘bucket company’ for my Family Trust? This bucket company becomes a beneficiary of your Family Trust This is automatic under most Family Trust deeds. As soon as you build the bucket company you can start distributing income from the family trust to this new corporate […]