Trust distributing foreign income to bucket company scenario
I posted this on ausfinance, and didn't get many answers so hopefully posting this here with some professionals might reveal some answers. Just trying to see if the additional tax leakage I'm seeing when I'm calculating what happens to foreign income that gets distributed to(or earnt) a bucket company) is correct:
Trying to understand how a bucket company works with regards to a trust distributing foreign income to it and how tax effective it is or isn't. Not sure if I've calculated everything correctly, more likely than not, I've missed something crucial so am hoping someone here can help with some feedback on what I'm thinking
Trust A has:
$10,000 gross foreign income(eg. dividends from VTS/VEU)
$1,500 tax credit paid - FITO(foreign income tax offset)
$8,500 paid in cash to Trust A as a result of the foreign dividends.
Trust A distributes $10000 to Bucket Company B, along with $1,500 FITO($8,500 in cash). Tax return for Company B will show foreign assessable income of $10,000, $1,500 FITO, and based on company tax rate of 30%, total tax payable will be $3,000, so will need to pay $1,500($3,000 tax payable - $1,500 FITO) in additional tax to ATO, leaving $7,000 in cash in company bank account. The $1500 paid to ATO will be added to corporate franking account.
In future, to get all the money out of Company B($7000), can pay to shareholders a fully franked dividend of $3,500, along with franking credits of $1,500. As this leaves $3500 in cash in the company, this will also be paid out as unfranked dividends of $3,500.
If these franked and unfranked dividends are paid out to a shareholder(lets call this person Shareholder C) on a 30% marginal tax rate, then the total tax payable on these dividends are calculated as such:
Grossed up franked dividends = $5,000
Unfranked dividends = $3,500
Assessable Income = 8,500
Total Tax payable on Assessable Income = $2,550
Franking credits of $1,500 offsets that $2,550 figure, so $1,050 is owed to ATO from individual shareholder.
Shareholder C has received $7,000 in cash from Company B, and owes ATO $1,050, so will end up with $5,950 cash in pocket after all taxes paid.
If Trust A had just paid the initial foreign income distribution to Shareholder C(who is also a beneficiary of Trust A) directly, then Shareholder C will receive the following($8,500 in cash), $10,000 in assessable gross foreign income, $1,500 FITO. And since they're on 30% marginal tax rate, they would need to pay an additional $1,500 to ATO, so this leaves them with $7,000 in cash in their pocket after all taxes paid.
In this scenario, it seems like its much better to just distribute the foreign income to shareholder C directly as they end up with more cash after tax($7,000 vs $5,950), primarily because even though the FITO does lessen the tax burden to the company, it doesn't carry across as franking credits to the shareholder, so the foreign income effectively gets taxed twice. Did I miss something somewhere or calculate something incorrectly? I understand that the bucket company can hold the funds indefinitely until the shareholder is in a lower tax bracket and maybe reap the benefits of less tax then, but if this is not due to happen for 10-20 years or may never happen, isn’t it better to just distribute the full amount to the individual right from the start as they’ll both(bucket company and individual shareholder) have the same amount of after-tax cash to invest/spend ie. $7,000?
EDIT: here's a hopefully easier to read table(adapted from another comment someone helpfully made on a related post)
| Direct to individual | Via company | |
|---|---|---|
| VTS net foreign income | 8,500 | 8,500 |
| FITO | 1,500 | 1,500 |
| Taxable income | 10,000 | 10,000 |
| Tax at 30% | 3,000 | 3,000 |
| Less FITO | -1,500 | -1,500 |
| Tax (frk cr for co) | 1,500 | 1,500 |
| Dividend (from company | - | 7,000 |
| Franking credit | - | 1,500 |
| Taxable income | - | 8,500 |
| Tax at 30% MTR | - | 2,550 |
| Less franking credits | - | -1,500 |
| Tax at individual level | - | 1,050 |
| Net economic benefit to the group | Direct to individual | Via company |
|---|---|---|
| Tax paid by the individual | -1,500 | -1,050 |
| Tax paid by company | -1,500 | |
| Net economic benefit | 7,000 | 5,950 |
| Net foreign income received by the group | 8,500 | 8,500 |
Posted Jun 17, 2022, 6:04 AM UTC · edited
You're not getting responses because what you have written is barely legible.
Apologies but I don’t know how to make it any clearer. I know it reads like gibberish and “tax talk” to the uninitiated but surely professional accountants here would understand what I’m trying to convey from a tax planning point of view. I’ve tried to break down the question into logical parts and paragraphs with clear numbers and calculations.
It basically boils down to whether or not the fact that FITOs, while lessening the tax burden for the corporate entity, doesn’t carry over as franking credits to the ultimate shareholder and by doing that, effectively acts as a double tax on that foreign income.
I’m assuming that this has come up as potential questions posed to tax accountants trying to plan their clients’ upcoming trust distribution resolutions effectively for the financial year.
Take it to an accountant dude. Accountants shouldn't have to go into this level of detail, for free.
What you are asking, is essentially asking for free tax planning and structure advice.
Have some respect for the profession and pay someone to do it properly. Atleast you know it's more reliable then to.
I’m already in discussions with my tax accountant, but he’s not great for tax planning and structuring in general. Most of the tax stuff I implement is stuff I’ve researched myself or heard about and have brought it to him to ratify and confirm if it’s legal or grey, etc.
That’s fine if no one here wants to answer for free, I thought it was a basic enough question that someone could shed some light on without needing to go into too much detail. I’m perfectly happy to pay for advice but I would like to know what I’m getting first. With the amount of conflicting advice given by different accountants, there is no guarantee that any advice is “correct” which is why I’m asking for general opinions on the matter.