A bucket company can help you save tax. Set up as a beneficiary to a trust, the term ābucketā is used because the company sits below your trust and is used to pour money into to reduce tax. This allows you to cap your tax payable at a corporate tax rate.
We want you to know why using a bucket company can be a great strategy for saving tax if you have a Discretionary or Family Trust that generates profits.
How to cap tax using a Bucket Company
A bucket company allows you to cap the tax on profits distributed by a trust to 30% or 25%. This is much less than the individual top marginal rate of 47%!
Here’s how this works:
Assume a trust earns $250,000 in profits from business.
Option 1:
Distribute profits 50 / 50 to Individuals 1 and 2.
Total tax payable = $66,734 (26.7%)
Option 2:
Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company at a 25% tax rate.
Total tax payable = $57,534 (23%)
The VALUE of this strategy in Option 2. is $9,200 in TAX SAVED!
A Bucket Company can help you save tax.
Note: This strategy assumes that the $70,000 in cash is available to be distributed to a bucket company, otherwise what is known as a Div 7A Loan Agreement will need to be entered into and loan repayments made over a 7-year period.
The cash in a bucket company can be used to invest in shares, property, or to lend to other entities at a specific interest rate.
How can Walsh Accountants help?
If you are interested in this strategy, you need to discuss with on of our Accountants BEFORE you implement.
This example is very general in nature and does not take into consideration your specific circumstances, different tax laws that affect the use of this strategy, and whether your “bucket company” can use a tax rate of 30% or 25%.
Our team of Accountants are very aware of these tax laws and can make this easy for you. If you are interested in speaking to one of our team members, contact us today.
Content in this article is general in nature and should not be taken as financial advice. If you are interested in this tax planning strategy, please contact our office to speak with one of our Accountants before proceeding any further.
