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Importance of Bucket Company
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Set up your Bucket Company with TMS Financials

TMS Financials provides strategic guidance on using bucket companies—also known as corporate beneficiaries—to enhance tax efficiency for your business. A bucket company is established as a beneficiary under a trust, with the primary aim of capping the tax rate on distributed income to the company’s rate, which is currently 25% for base rate entities. This is in contrast to the higher personal marginal tax rates, which can go up to 49% including the Medicare levy.

These companies are beneficial because they act like a “bucket” sitting under a trust, collecting and distributing the trust’s income. However, it’s crucial to navigate the regulations governing Family Trusts carefully to avoid additional taxes like the family trust distribution tax. In managing your corporate affairs, TMS Financials ensures compliance with essential tax laws, including Division 7A, which governs loans and payments from private companies to their shareholders or associates.

Our team at TMS Financials can help you manage your company’s tax obligations efficiently, leveraging strategies that optimise your tax liabilities and maximise the financial benefits available to you within the parametres set by the Australian Taxation Office (ATO). We focus on optimising the distribution of dividends, protecting assets, and aligning with your business growth objectives. Through our comprehensive tax planning and asset protection strategies, we guide you in managing your business income in the most tax-effective manner, ensuring you benefit from potential tax savings while adhering to all statutory requirements.

Why Choose TMS Financials

By choosing TMS Financials, you gain access to expert tax management strategies that let you concentrate on expanding your business and achieving your financial and personal ambitions.

Maximise Your Tax Benefits

We ensure your bucket company strategy is optimally structured to capture tax-saving opportunities effectively. By managing your business income in the most tax effective manner, we aim to legally minimise your tax obligations while ensuring full compliance with the Income Tax Assessment Act and other pertinent regulations.

Gain Financial Flexibility

Our approach helps you keep more of your company’s earnings at a more favourable tax rate, providing you with the flexibility to reinvest back into your business or to manage cash flow to suit your operational needs. This strategy is particularly advantageous for business owners looking to grow their businesses or who require enhanced control over their financial resources.

Protect your assets with TMS Financials

Our team at TMS Financials specialises in providing personalised tax solutions tailored to your unique situation. We can help you navigate through the complexities of tax planning, identify the most effective strategies for your situation, and ensure you maximise your tax savings.

We’re an Australian tax accounting firm with 30+ years of experience serving business owners and investors. Our reputation for reliability and exceptional client service is built on providing accurate financial advice and asset protection. We remain committed to serving our clients with integrity, professionalism, and quality, and have the expertise to help you succeed.

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We are a Sydney based tax accounting firm servicing clients Australia wide online since 1993

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Principal of TMS Financials

We strive to build long-term relationships with our clients and to be a trusted advisor for all their financial needs.

Why Should You Set Up a Bucket Company?

A bucket company can be an effective tax strategy in Australia, particularly beneficial for investors and business owners. However, it’s essential to determine if starting a bucket company aligns with your specific circumstances.

A bucket company strategy may be advantageous if you fit any of the following criteria:

  • A business owner aiming to save for your family’s future
  • A business owner experiencing significant variations in annual income
  • A business owner who is approaching retirement or planning to sell their business, and won’t be expecting an increase as much business income

However, employing a bucket company might not be suitable if you’re subject to Personal Services Income (PSI) rules. These rules are designed to prevent individuals from reducing their tax liability by rerouting income from personal services through companies, partnerships, or trusts.

Benefits of a Bucket Company

Tax Savings

Using a bucket company enables a trust to distribute its income to the company at a lower tax rate compared to individual beneficiaries. This arrangement can lead to substantial tax savings for the trust’s beneficiaries.

Asset Protection

A bucket company can serve as a vehicle for asset protection, shielding assets more effectively from creditors than an individual trust might.

Flexibility

A bucket company offers flexibility in managing how income from the trust is distributed, helping you meet your specific financial goals.

Case Study

How a Bucket Company Can Be Used for Tax Planning and Asset Protection

Meet John, the head of his family and owner of an IT Computer & Retail business operating as a trust. This year, the business was highly profitable, earning a profit of $600,000. John is keen to use these funds optimally to pay off his home loan, enjoy a family holiday, and save for retirement. He aims to ensure minimal tax liability for his family and protect his assets.

John consulted with TMS Financials to explore tax planning strategies. We advised him to establish a bucket company, also referred to as a “wealth accumulation company.” This allows the trust to distribute income to the company, benefiting from a 30% corporate tax rate—significantly lower than individual tax rates. We provided John with various scenarios demonstrating how to distribute funds to save on taxes effectively.

Scenario 1

Without a bucket company, if John’s IT Computer Trust distributes the entire $600,000 to him, he would face a tax of $261,667 at the highest marginal tax rate, including the Medicare levy.

Scenario 2

Distributing $300,000 each to John and his wife Jenny results in a total tax of $232,334, split equally between them. This scenario demonstrates the personal tax implications without employing a bucket company.

Scenario 3

The trust distributes $180,000 each to John and Jenny, and the remaining $240,000 to the JJ Wealth Bucket Pty Ltd. This strategy results in a total tax payable of $187,934. The savings of $73,733 compared to Scenario 1 illustrate the effectiveness of using a bucket company to distribute income in a tax-efficient manner.

Scenario 4

Here, the JJ Wealth Bucket Pty Ltd acts as a shareholder for a family trust, distributing $80,000 each to John and Jenny, with the balance going to the bucket company. The total tax payable is $168,134, showcasing a substantial tax saving of $93,533 compared to Scenario 1.
This approach not only ensures significant tax savings, it also enhances asset protection and aligns with John’s personal and financial goals. John continues to work with TMS CPA Accountants to refine strategies that best meet his needs, ensuring his assets are safeguarded and his family’s tax burden is optimised.

Optimising Your Bucket Company Structure

To enhance your bucket company structure, consider establishing a separate trust to hold the company’s shares. This enables the trust to distribute dividends in a tax-effective manner, while also adding an extra layer of asset protection.

When a company accumulates profit, holding shares in a personal capacity may expose individuals to legal risks. By using a separate trust, you can protect these assets and maintain flexibility in how dividends are distributed.

Contact us today to explore if the bucket company structure could be beneficial to your specific needs and unique situation.

What Do You Do With Money in a Bucket Company?

Once the money is in a bucket company, it can be used for a variety of purposes, such as investing in assets, paying dividends to shareholders, or making loans to related parties. One specific use of the money in a bucket company is through a Division 7A loan. A Division 7A loan is a loan made by a private company to its shareholders or associates. These loans are subject to strict compliance requirements, including a minimum repayment obligation using the ATO’s benchmark interest rate and the terms of a 7 year repayment period for unsecured loans.

Another use of the money in a bucket company is through declared dividends. Dividends are payments made by a company to its shareholders out of its profits. In order to declare a dividend, the company must have sufficient profits and cash reserves to pay the dividend. The dividends are typically paid out of profits that have already been taxed at the company tax rate, and shareholders may also be eligible for franking credits, which are tax credits that can be used to reduce the personal income tax liability of the shareholder.

It’s important to maintain accurate records of all transactions and to comply with all relevant laws and regulations, including those related to taxation and asset protection. Additionally, it’s important to consider the interest rate on any loans made by the bucket company, as well as the repayment terms and any potential impact on the company’s liquidity. Overall, it’s important to seek professional advice before making any financial decision regarding the use of money in a bucket company.

Continue reading our article “Taking Money Out of Your Private Company: How to Avoid Division 7A Penalties” to learn more about the benefits and risks involved in Division 7A.

Next Steps

It’s crucial to consult with professional advisors to identify the most tax-effective structure for your business entities. While a bucket company can be a valuable part of your tax planning, its suitability largely depends on your specific circumstances and both your personal and professional objectives.

Our tax accountants bring decades of expertise in helping our clients manage their personal tax rates and optimise the tax they owe, all within the guidelines set by the Australian Taxation Office (ATO). If you own a private company and are subject to the highest marginal tax rate and you’re not currently using a bucket company, now is an opportune time to connect with us. We can discuss whether a more tax-efficient strategy could be beneficial for you.

FAQs

What is a Bucket Company?
A bucket company acts as a corporate beneficiary of a trust.
What tax rate does a Bucket Company pay?

A bucket company is taxed at the corporate tax rate, which varies depending on the company’s status. Base rate entities are taxed at 25%, while other companies may be taxed at 30%. In past financial years, the rates were higher—27.5% from 2017 to 2020 and 26% in the 2020–21 financial year.

Trusts allocate their net income to beneficiaries, who then pay tax on their received income at applicable rates. For individuals, the highest marginal tax rate is 45% for those with a taxable income over $180,000, excluding the Medicare levy. Company beneficiaries pay tax at the corporate rate.

What can you do with money in a Bucket Company?
Besides using a bucket company to save on taxes through dividends, it can serve as a holding entity for long-term investments like shares or property, functioning as an investment company. It’s essential to note that companies do not benefit from the 50% Capital Gains Tax (CGT) discount available to individuals. For personalised advice on the benefits of a bucket company structure, please contact us.
Will my family trust structure allow for a Bucket Company?
A bucket company must be an eligible beneficiary of your family trust to function as intended. It’s crucial to review your trust deed to confirm this eligibility. Additionally, depending on your structure, a Family Trust Election might be necessary.
How do you get money out of the Bucket Company?

There are three primary methods for extracting money from a bucket company:

Pay dividends to shareholders

Shareholders receive dividends taxed at the company rate and get franking credits for the tax paid.

Division 7a Loan

This special type of loan requires repayment of both principal and interest. For more details, see our article on Division 7a loans.

Discretionary trust structure

Profits can be distributed through a discretionary trust, potentially optimising distributions towards beneficiaries with lower marginal tax rates.

Next step is to contact TMS Financials

TMS Financials provides you with a team of experienced professionals that help you achieve your financial goals through smart tax structures and strategic structuring.

Book a financial health review to see the difference we can make in your financial future.

Disclaimer

This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.

Contact us today for a consultation.

Contact us today to learn more about how our accounting services can benefit your business. We look forward to hearing from you and helping you achieve financial success!

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