What is a Bucket Company?


A bucket company is a separate entity used to cap the tax rate on business profits. It operates in conjunction with a trust (usually a discretionary trust) that distributes profits to the bucket company instead of directly to individuals. This setup can significantly reduce the overall tax burden.

Benefits of a Bucket Company

  1. Tax Efficiency: By distributing profits to a bucket company, you can take advantage of the lower corporate tax rate, which is currently 25% for base rate entities in Australia. This is much lower than the top marginal tax rate for individuals, which can be as high as 47%​ ​.
  2. Deferred Taxation: When profits are held within a bucket company, the tax is deferred until those profits are distributed to shareholders, often in the form of dividends. This allows for more strategic planning around when and how to take income​ ​.
  3. Asset Protection: Holding the shares of the bucket company in a separate trust provides an additional layer of protection against personal legal liabilities. This structure can shield significant amounts of wealth from being exposed in legal proceedings​ ​.

Setting Up a Bucket Company

To set up a bucket company, you typically need to revise the structure of your existing trust to include this entity. The profits from the trust are then distributed to the bucket company. It’s important to ensure compliance with the Australian Taxation Office (ATO) requirements, including making actual distributions to the bucket company’s bank account before lodging the tax return.

Division 7A Loans

If the trust cannot pay the distributions in cash before the tax return is lodged, a Division 7A loan can be created. This loan must have a maximum term of seven years (for unsecured loans) and must be repaid with interest at the benchmark rate. This mechanism ensures that the distributions are treated as loans rather than assessable income, preventing additional tax liabilities​.

Practical Example

Consider a business with a profit of $500,000. If this profit is distributed directly to an individual, the tax payable could be around $221,542. However, by using a bucket company, the effective tax can be significantly reduced to $119,417, resulting in a saving of over $102,125​ ​.

Long-Term Investment Strategy

The profits held within a bucket company can be reinvested in various assets, such as shares, properties, or other investments. This helps in creating additional income streams for the business owners while benefiting from the lower corporate tax rate. However, note that companies do not receive the 50% capital gains tax discount available to individuals and trusts​ .

Conclusion

Utilizing a bucket company is a sophisticated strategy to minimize tax and maximize profit. It requires careful planning and compliance with tax laws, but with the right setup, it can lead to substantial tax savings and provide additional layers of asset protection. Consulting with financial advisors, like those at Liston Newton, can help you tailor this strategy to your specific business needs​

Want to know more? – Contact us

Please enable JavaScript in your browser to complete this form.