Let’s have a look at the benefits of using a “bucket company” to reduce taxes on profits distributed from a trust.
What is a bucket company?
A “bucket company” is a term used in Australian tax law to refer to a private company that is set up for the sole purpose of receiving and holding profits from a discretionary or family trust.
Its purpose is to cap the tax paid on trust profits distributed to beneficiaries by diverting a portion of the profits to the company, which can then be taxed at a lower rate.
The company can hold onto the profits or use them for investment purposes, such as purchasing assets or making loans to other entities.
This strategy is often used as a way to minimize the overall tax paid by beneficiaries of the trust. It’s important to note that the use of a bucket company structure is subject to specific tax laws and regulations and should be discussed with a qualified accountant or tax advisor.
Bucket company tax rate
If you own a Discretionary or Family Trust that generates profits, this strategy could be applicable to you. A bucket company allows you to limit the tax on distributed trust profits to 30% or 25%, which is much lower than the top marginal rate of 47% for individuals.
Here’s an example of how it works:
Let’s say your trust earns $250,000 in profits from its business.
Option 1 is to distribute the profits equally between two individuals, resulting in a total tax payable of $66,734 (including Medicare Levy) at a rate of 26.7%.
However, with Option 2, you can distribute $90,000 to each of the two individuals and allocate the remaining $70,000 to a bucket company, which is taxed at a 25% rate. This would result in a total tax payable of $60,534, or 24%.
It’s important to note that this strategy assumes that the $70,000 in cash is available for distribution to the bucket company. Otherwise, you may need to enter into a Div 7A Loan Agreement and make loan repayments over a 7-year period.
The total value of this strategy is $7,100 in tax savings.
The cash held in a bucket company can be invested in shares, property, or loaned to other entities at a specific interest rate.
Please note that this strategy is subject to different tax laws, and it’s essential to discuss it with us before implementing it. Contact us today to get started.