It is possible to avoid Division 7A altogether, but there are potential drawbacks because we don’t get access to cash personally, but that may be okay depending on your circumstances.
Pay the cash back into the company and repay the loan. But the downside or the drawback is, it may be a poor use of funds.
If you’ve already paid 26% tax in the company name and you want to get access to that cash permanently, then you can issue dividends or salary depending on your structure, to the individuals in the family group. You may be taxed up to 47%, and we call that the top up tax of 21%.
We’ve got the bucket company because we wouldn’t want to buy shares in a trading entity because if you are in business, it is attracting risk in your entity. So, from an asset protection perspective, we don’t want to create an asset to potentially lose if something were to go wrong in the business. But we can bolt on a bucket company to one of your structures so that we can take the dividends out of your trading entity, put it in a bucket company, and buy shares or managed funds. There is a way to do it, but we don’t want to buy shares or managed funds in a trading entity.
If you buy shares or managed funds in a company, you do not get access to the 50% capital gains tax discount if you own shares, managed funds, assets, or property, for more than 12 months. You get a 50% discount in your own name, or in a trust name whilst in a company, you do not.
Shares or managed funds often have an income component and your tax rate on that is 26% or if it’s a purely investment company, you’ll be paying 30% tax on your dividends and trust distributions from the managed funds or shares.
If you have the choice, the preference would be to invest in income focused shares and managed funds in the bucket company.
And if you have capital growth assets, there are certain index funds that the goal is to produce an income stream and there are index funds where the goal is to grow in capital but not pay anywhere near as much income along the way because your priority is a capital gain. But you may want to structure it in a trust instead, so that you will be able to access a 50% discount if you were to sell the index fund or managed fund.
Watch the full webinar, ‘Solving Company Loads Division/7A Problems’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP
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