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Should you go for a bucket or holding company when structuring your business and wealth?
Bucket or Holding Company
At first sight the outcome is the same, no matter whether you go for a bucket or holding company.
But there are subtle differences that can make a big difference, as Geoff Stein of Brown Wright Stein Lawyers in Sydney will tell you in this episode.
Here is what we learned but please listen in as Geoff Stein explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Bucket or Holding Company
You have two common structures to choose from when structuring your business and wealth. Of course there are more but these are the two most common ones.
Options # 1 is to put your business into a company and then have this trading company held by a discretionary trust. And then you have a bucket company on the side, also held by a discretionary trust.
Option # 2 is to have your trading company held by a holding company and then a discretionary trust on top. So in this structure you don’t have a bucket company on the side. Instead the holding company is to fulfill this role.
Same Outcome Apart From CGT
And at first sight the result looks and feels the same. With both structures you can,
- Park profits in the bucket or holding company;
- Invest the parked profits as you see fit;
- Have flexibility who to distribute the profits to; and
- Protect assets from creditors.
There is a difference though. In option # 2 you don’t get the 50% CGT discount when selling the shares of the trading company. To sell you would have to clear out the holding company apart from those shares and then have the discretionary trust sell the shares in the holding company.
But there is an even bigger difference. And that one is about asset protection.
Asset Protection
There is a provision in the Corporations Act that in certain circumstances can make a holding company liable for the debts of its subsidiaries.
In the late 1990s Patrick Stevedores had issues around workers comp, wage payments and insolvent trading. So they came up with an idea. They shifted the employment of workers and related liabilities into a holding all the while trying to protect the trading company. And it worked. The courts rules in favour of Patrick Stevedores.
In response, the government introduced provisions into the Corporations Act which imposed upon a holding company a similar test for insolvency – trading upon insolvent – as it imposed upon a director. It is not identical but a similar concept.
So if directors of a holding company or a holding company commits a company to continue to trade while it is insolvent without providing financial support, then the assets of that holding company are at risk.
As a result, it is easier for creditors to attack a holding company than it is to attack a bucket company that just sits to the side. So if you want to play it really safe, go for a bucket company held by a separate discretionary trust (option #1) rather than an interposed holding company (option #2).
Transfer of Shares
And then we went slightly off-topic, but the question we discuss is quite important and so we don’t want to skip it here.
The question is whether the transfer of shares in a corporate trustee has any significant implications apart from the change in shareholders?
And the answer is that it usually doesn’t – as long as the trust is clear of two things.
1 – The trust must not own land.
If the trust directly or indirectly owns land, then a change in corporate trustee shareholders can trigger CGT and stamp duty. So as long as your trust doesn’t hold land, changing the corporate trustee shareholders is fine.
2 – The trust deed must not link shareholders to beneficiaries.
If the change in corporate trustee shareholders also means a change in beneficiaries, then the change in beneficiaries could trigger a trust resettlement.
A change in shareholders usually doesn’t mean a change in beneficiaries. But just in theory if your trust deed makes this link, then you would have to consider the risk of a trust resettlement.
Since Commercial Nominees a trust needs continuity of three things to avoid triggering a resettlement. The terms of the trust, trust assets and trust beneficiaries must not change.
So as long as the change in shareholders doesn’t mean a change in beneficiaries, you are fine. You can change the shareholders of your corporate trustee without any legal repercussions. But please check all this with your lawyer.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 17 July 2020
Tax Talks spoke to Geoff Stein - Partner at Brown Wright Stein Lawyers - for more details.
