Ok, another fun update on trusts. Today’s AFR and various other media outlets are reporting that the tax office wants to take a harder stance on trusts that are using what’s commonly referred to as ‘bucket companies’.

For background; bucket companies work when a discretionary trust has substantial net income and / or when all of the individual beneficiaries exceed the 30% tax bracket. The remaining profit from the trust is then given to a company for tax purposes, whilst the trust continues to hold the funds with an (unpaid) entitlement for the company. Ie, the cash never leaves the trust and is simply retained and reinvested instead.

The benefits are obvious; all the benefits of using a trust, plus tax is capped at a maximum 30% and the trust has free reign to continue investing without loss of capital.

Is the bucket still a viable structure?
Is the bucket still a viable structure?

This strategy, however, is something that both myself and my old man (Dale Gatherum-Goss), have been cautious about for some time now. The potential danger, as it appears the tax office is now looking at, is that generally speaking there is going to be tax to be paid somewhere along the line whenever funds leave a company. So from that, we can see that by not actually paying the entitlement it is then possible that the company should be receiving interest on the funds owed to it. This could potentially be seen as a similar arrangement, for example, as a debit loan scenario involving a company and its directors.

Having said that, it is a consideration only at this point and not one that most people need to worry too much about. If – and it is only an ‘if’ so far – the tax office does go down this path, it will be a complete backflip on previous tax rulings that they have released. I would expect that given the way many accounting firms’ partners structure their affairs, including many at the Big4, the industry itself will be the first to object to any change in the law here.

At first glance, it sure looks like Michael D’Ascenzo isn’t a big fan of the structures lately. More likely, though, is that the tax office is simply looking to provide greater clarity and in doing so, close various loopholes currently open to exploitation.