Tax saving using a bucket company
In this blog article, accountants at Uplift Accounting shares how to use “bucket companies” or what is otherwise known as “corporate beneficiaries” to save tax and how this tax-saving strategy could help cap your tax rate at 26% in 2021 tax year.
If you are a sole trader, you can pay up to 47% in tax including the medicare levy of 2%. 30 June will be here before you know it. Without the right strategies in place, you could be left paying way more tax than necessary. So now is the time to look at what you can do to minimise your tax bill. One way to do this is to utilise a corporate beneficiary, otherwise known as a ‘bucket company’.
What is a bucket company?
A bucket company is a company that is set up as a beneficiary of a discretionary trust, into which distributions from the trust are made to cap the tax rate on the trust’s income to the base rate entity company tax rate of 26% in 2020-21 tax year. This corporate beneficiary sits below the trust and is purely used to pour money into it to reduce tax and therefore uses the term “bucket”.
Who is the “Bucket Company” strategy for?
The bucket company strategy ideally suits the business owners or investors who run their businesses or receives income through a discretionary trust structure. At the same time, you should not be subject to Personal Services Income (PSI) rules.
A bucket company simply operates to take ‘excess’ profits, after distributing tax-effective amounts to the individual beneficiaries of a family trust.
If you are a business owner who earls more than what you need to manage your lifestyle and looking to build a nest egg for your family, using a bucket company can be very much useful. This is also used as a tax-planning strategy when your business income fluctuates significantly every income year and you would need to keep your tax bill consistent.
What do I need to consider when using the bucket company strategy?
Although this is a great tax savings strategy for business owners and investors, the Tax Office is not a big fan of bucket companies, so great care needs to be exercised in the use of this strategy.
If you elect to distribute to the bucket company for the tax yeat, you will need to make a commitment for the physical distribution for the same amount to the bucket company’s bank account before the lodgement of the tax return.
The best thing the company can then do with the cash is lent it to another entity under a complying Division 7A loan, and for that other entity to then invest the cash so as to qualify for a deduction on the interest paid back to the company. The company will then also pay a series of dividends over time to enable the other entity to fund the principal repayments on the loan.
Div 7A Loan
In general, an unsecured Div 7A loan:
- Has a maximum term of 7 years
- Has a minimum annual repayment plan
- Has interest that is payable at a commercial rate prescribed by the government
The minimum repayments need to be met by the trust physically making payment to the bucket company each year. However, it may be possible for the bucket company to declare dividends that can be off-set against the minimum repayment obligation.
What can you do with the money in the bucket company?
Whilst the bucket company strategy is useful in managing short term and tax obligations of a trust, it can be used as an investment structure to hold long-term investments. As an investment company, it could actually help to generate another income source for the owner if properly set up and invested in shares, managed funds, real properties or other businesses.
In conclusion, this is a brief overview of what we call ‘Bucket Companies’ and how you can use it to cap your tax rate at 26% in 2021 tax year. A good accountant can help to create the best tax minimisation strategies to suit your specific situation.
Accountants at Uplift Accounting are qualified to provide advice on tax planning. If you would like to book in a consultation with us for your tax planning prior to the tax time, please contact us here.
About Uplift Accounting
Uplift Accounting is a boutique tax practice headquartered in Mulgrave, Melbourne. A team of qualified and well-experienced tax accountants, bookkeepers and mortgage brokers in Uplift Accounting will help you navigate your personal and business tax affairs smoothly.
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