Bucket Company - A Tax Saving Strategy
Bucket Company strategy - Could it save you thousands in tax?
Who would not want to have thousands of tax savings? Of course everyone loves that. Having a lot of tax savings means opportunity to earn more and invest more. There’s one way we can actually achieve that, it’s called a Bucket Company Strategy.
What is a Bucket Company?
A Bucket Company is a company we create that can be a Corporate Beneficiary which we will use for our business strategy to help us cap our tax rate up to 30%. Having a Bucket Company Strategy will benefit the Investors, Business Owners, those who are receiving income and running their business through a discretionary structure and those not under PSI or Personal Services Income rules. After distributing the reasonable amount of profit to people within the family group, the Bucket Company will take the remaining profit.
How will it happen? Or how can we make use of the money that the Bucket Company will take? Don’t worry because there are actually 2 ways that you can take the money out of the Bucket Company.
How to take money out of a Bucket Company
Either we pay dividends to the shareholders from the company or loan it from the Company.
1) Paying dividends to shareholders from the company
In paying a dividend to the shareholders who owns the company, they are being taxed for the dividend but they are also receiving a “franking credit” for the tax that the company has already paid, i.e the company has already paid 30% tax on the income. The Shareholder is taxed for the full amount of the dividend, however, the Franking credit will offset the tax bill for the shareholder. For example if the shareholder will pay on the average 39% in tax on the dividend received, they will get a 30% franking credit and will only pay 9% top up tax on the dividend they receive.
So it is very important to consider the tax impact on paying dividends to the shareholders of the Bucket Company.
For individuals you can only distribute to them in the % of shares that each of them own. Commonly we see husband and wife owning 50% each of the bucket companies, which means there is limited control over who actually receives the dividends. So it is generally best to actually have another or separate discretionary trust to own 100% of the shares in the Bucket Company, we can refer to it as the "Asset Trust".
In that way we can attain flexibility because we will pay dividends from the company to the Asset trust, then the trustees of the asset will then allocate the dividends to the members of the family who pays the least amount of tax.
2) Loan it from the Company
We refer it as ‘Division 7A loans’ where your Bucket Company will basically become a bank. You will loan money from it and you need to pay the principal and interest repayments. If your loan is unsecured, you have 7 years to pay back the cash. If your loan is secured (property for example),then you have 30 years to pay back the cash. The interest rate is set each financial year by the ATO, but usually only around 5-7%. In doing so it acts like a bank without the many hassles in obtaining an actual bank loan for your business.
Also, it is a very good strategy when you want to invest in a property and you can get the 20% deposit from your bucket company and then the remaining 80% from an actual bank.
Therefore, if secured, you can have 30 years to pay back the loan to your own company. You will pay the tax deductible interest from the Asset Trust back to your own Bucket Company (Always speak to a mortgage broker before going ahead with this type of arrangement).
(Disclaimer, we are not a licenced credit representative, always speak to a Mortgage Broker with questions about finance, the following is only based on our understanding of banks at the current point in time). Now, don’t worry because the Bucket Company will not hinder you from getting finance from a bank. Being a business owner, the bank will look and take your total group income into account. So distributing a certain amount to a Bucket Company will reflect to the bank as a business income.
Save Thousands In Tax Every Year
With the right use of the Bucket Company Strategy, it can save you thousands of dollars every year. An example is having a trust earning $200k profit that needs to be allocated to entities or people within the family group. Now we need to have eligible people receiving up to $87K in income, this is generally the ideal max level for individuals, as this is normally enough for them to cover their living expenses etc. If we distribute over $87k to an individual they will then start paying 39% (based on the current tax rates) for every dollar over $87k. But if we distribute to a Bucket Company we would only pay 30% on the first dollar it receives, and every dollar after that. That is because as per Company tax rates a Company with investment income will only pay a flat rate of 30%. So clearly from this example we can be saving at least 9% in tax compared to distributing to just individuals. This can add up quite quickly, you can be saving thousands every year by utilising this type of strategy.
WITH A BUCKET COMPANY STRATEGY, YOU NEED TO ENSURE THE DISTRIBUTION IS ACTUALLY PAID
The final thing to really understand with a Bucket Company Strategy, is that the cash needs to actually be paid to the Bucket Company. If we only do an on-paper distribution we raise Division 7A issues and the ATO obviously don’t like that. After $87k is paid to individuals, there is usually enough cash to physically pay over to the Bucket Company, as $87k for individuals normally covers all their living expenses etc.
How to setup a Bucket Company?
If you want to setup a Bucket Company and a Bucket Company Strategy, please get in touch with us. We can discuss through whether or not this would be a good strategy and structure for you. There are other things to consider further as well, such as who the shareholder of the Bucket Company will be, will a Trust own the shares in the Bucket Company or individuals for example. We’ll go through everything you need to know to setup a Bucket Company and we’ll also set it up for you and arrange all the paper work and ATO tax registrations.
Disclaimer, we advise speaking to us as accountants before employing this strategy or anything mentioned in this article to ensure it is the best option for your specific situation. Head to our recent article If you want to read some further strategies on how to save tax australia.
If you want to learn more and see if a Bucket Company Strategy could be an option for you, feel free to contact us, or book a free consultation call.