Who owns the shares in the bucket company?
The document package includes a separate discretionary trust to hold all the shares in the bucket company.
This means that when the bucket company declares and pays a dividend in future years, that dividend is paid to the
discretionary trust, and can be paid through to beneficiaries in a tax effective manner.
Can I use my existing discretionary trust to hold shares in the bucket company?
No, you will need a separate discretionary trust. The documentation for the separate discretionary trust is included in the Cleardocs document package. This recommendation is founded in adopting best practice.
A discretionary trust making a distribution to a bucket company, of which the same discretionary trust is the sole shareholder (and from which it will therefore receive the distributions) looks artificial.
Why does the product include a discretionary trust deed set-up document?
This document creates a new discretionary trust, the trustee of which will become the only shareholder of the bucket company. The named beneficiaries of this new discretionary trust will be the same named beneficiaries of your existing discretionary trust. This will enable the bucket company to later distribute any income it earns as a dividend to the new discretionary trust (which in turn distributes it to the beneficiaries). The recommendation to use a separate discretionary trust as the sole shareholder of your bucket company is founded in adopting best practice.
Why can't the beneficiaries of my existing trust be shareholders of the Bucket Company?
The beneficiaries of your existing discretionary trust can be the shareholders of your bucket company, however this would defeat the purposes of setting up the bucket company.
If the beneficiaries of your existing discretionary trust were also the shareholders of the bucket company – then any dividends declared by the bucket company must be distributed to the beneficiaries as shareholders in proportion to their shareholding. In this instance, the bucket company would be required to distribute the dividends to the beneficiaries, as shareholders, who will each have different marginal tax rates.
In comparison, using a second discretionary trust as a shareholder of the bucket company will give you flexibility as to which beneficiary to ultimately distribute the funds to and in what proportion e.g. making the largest distribution to an individual with the lowest marginal tax rate.
When completing the discretionary trust deed set up, should I use a corporate trustee or an individual trustee?
The primary role of the trustee of the new discretionary trust you create will be the passive receipt of dividends from the bucket company (as it will be the sole shareholder of the bucket company). Accordingly, the preference would be to use an individual(s) as trustee rather than a corporate trustee. If you wish to use a corporate trustee (and you do not already have a company which you can use), you will need to incorporate the company before you establish the new discretionary trust and before you establish the bucket company.
Will the bucket company be able to receive distributions from my existing discretionary trust?
Usually yes. You need to correctly establish the bucket company so it is an eligible beneficiary of the existing discretionary trust.
You need to carefully review that existing discretionary trust's deed to see how a company qualifies as an eligible beneficiary.
The deed may include in the classes of eligible beneficiaries "Companies ... of which any of the beneficiaries otherwise mentioned in this schedule is a shareholder or director." This means a company of which a named beneficiary is a director would qualify;
The deed may contain a restriction on classes of eligible beneficiaries — for example if the deed restricts beneficiaries to blood relatives. Cleardocs' direct lineal descendants trust does this, meaning a bucket company could only be specifically named as an eligible beneficiary by the trustee, and only if the bucket company had a ‘sufficient connection’ to the trust’s existing beneficiaries.
What if I do not have an existing discretionary trust deed of any kind?
In that case you must first establish the discretionary trust which will have the bucket company as a beneficiary, then establish the discretionary trust which will own the shares in the bucket company, before you can establish the bucket company using this document package.
Cleardocs advises against using the direct lineal descendants version of its Discretionary Trust — excluded beneficiaries document package when setting up your trust(s) (ordering this product will present difficulties in adding the bucket company as a beneficiary).
Why do I need Division 7A loan agreements?
There are two instances where Division 7A loans will likely be required to manage unwanted tax outcomes:
- firstly, where the trustee of your existing discretionary trust decides to distribute income to the bucket company but is unable to pay the income to the bucket company at the time of making the decision (First Division 7A Loan): the ATO in Taxation Ruling 2010/3 considers that the bucket company has lent this money to the trustee and that such arrangement should be documented by way of a Division 7A loan agreement; and
- secondly, where the bucket company receives the distribution of income from the trustee of your existing discretionary trust and the bucket company then lends the money to its 'associates' (that is, beneficiaries of either trust) (Second Division 7A loan).
What are the tax implications of the trustee making a valid distribution of trust income to the bucket company?
The income which the bucket company receives by way of a valid trust distribution, will be taxed at the existing corporate tax rate in the hands of the bucket company.
Thereafter, the income of the bucket company can be ultimately distributed to the beneficiaries of the customer's discretionary trust (by way of franked dividends, i.e. the beneficiaries will not be required to pay tax on the proportion of the dividend which the company has already paid tax). These distributions are made at a later time, ideally when the beneficiaries' marginal tax rates are at or below 30%.
Can a person or entity be the trustee of more than one of the discretionary trusts used in this product?
While you can be the trustee of more than one trust, our lawyers at Maddocks do not recommend it as it may lead to confusion and/or a conflict of interest for the trustee, who will have a separate set of responsibilities in relation to each trust.
Do I need a Director Identification Number?
It is a requirement of law that directors now hold a Director Identification Number. If the product you are purchasing involves the creation of a company, creation of a corporate trustee or the appointment of a new director, then each director of the company/corporate trustee will need to verify their identity by applying for a director identification number (Director ID). Directors will retain the same Director ID even if they cease being a director, become a director of another company, change names or move interstate or overseas. Directors will not need to apply again or renew their applications.
If a person is appointed as a director:
- between 1 November 2021 and 4 April 2022, they must apply for a Director ID within 28 days of appointment.
- from 5 April 2022, they must apply for a Director ID prior to appointment.
For information on how to set up your Director ID, visit: https://www.abrs.gov.au/director-identification-number/apply-director-identification-number.