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
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
Protect your assets with TMS Financials
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.
TMS Financials is online now
INDUSTRY ASSOCIATIONS
TMS Financials is a proud member of the following
Eng Sivieng
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
Flexibility
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
Scenario 3
Scenario 4
Optimising Your Bucket Company Structure
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?
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?
Will my family trust structure allow for a Bucket Company?
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!