Bucket Company Setup.
A bucket company (otherwise known as a corporate beneficiary) is a company that's set up as a beneficiary of a trust with the purpose of allowing any income the trust distributes to the bucket company to be payable at the company tax rate, currently 25% (only if it's a base rate entity), as opposed to the individual marginal tax rate (the top tax rate for individuals is currently 49% including Medicare levy).
They're called bucket companies because they sit below a trust like a bucket and are used to distribute income to it. It's important to keep in mind there are rules around Family Trusts and in those structures distributing within a family group, otherwise family trust distributions tax may apply.
At Causbrooks, our objective is to simplify your company's compliance with its legal and tax requirements, enabling you to concentrate on business growth. We help you manage your company’s tax rate efficiently, use strategies to minimise the amount of tax you pay, and handle requirements under laws like Division 7A. Our team ensures you distribute your company's income and manage dividends in a way that maximises your financial benefits while protecting your assets.
Why Choose Causbrooks.
Maximise Your Tax Benefits.
We ensure your bucket company is structured to take full advantage of tax optimisation opportunities. By managing your business income efficiently, we help to legally reduce your tax liabilities, ensuring compliance with the Income Tax Assessment Act and other relevant regulations.
Gain Financial Flexibility.
We help you retain more earnings within your company at a favorable tax rate, giving you the opportunity to reinvest in your business or manage cash flow according to your needs. This approach is especially beneficial for business owners who are planning to expand or who need greater control over their financial resources.
Protect your Assets with Causbrooks
At Causbrooks, we’re dedicated to helping businesses with their taxation and accounting needs. If you’d like to discuss your own situation, please complete the form below.
Our team of dedicated accountants is committed to providing the best possible experience for our clients, and we believe that our combination of longevity and experience in the industry and our commitment to embrace innovation and change make us uniquely qualified to do so.
Why Should I Set Up a Bucket Company?
While they are generally useful for investors and business owners and there is no doubt that a bucket company can be one of the most tax-effective strategies in Australia, it may not be ideal for your unique situation.
A bucket company strategy may be of benefit if you are any of the following:
a business owner who wants to build a nest egg for their family
a business owner who experiences large fluctuations in income from one financial year to the next
business owners coming up to retirement or looking to sell their business, and who won't be earning as much business income moving forward as a result
Using a bucket company will not work for you if you are caught under the Personal Services Income (PSI) rules, which exist in order to prevent individuals from reducing or deferring their income tax by diverting income they receive from their personal services through companies, partnerships, or trusts.
Benefits of Setting Up a Bucket Company.
Tax Efficiency.
A bucket company can help you reduce your tax liability. With a corporate tax rate of 25% for base rate entities, this is lower than the individual top marginal tax rate of 45% (excluding the Medicare levy). For instance, if you distribute $100,000 of business income through a bucket company, you could save at least $15,000 in taxes compared to paying personal income tax at the highest rate.
Income distribution flexibility.
Using a bucket company within a family trust structure enhances your options in how income is distributed. Rather than fixed dividends based on shareholding, a trust can own the shares, allowing for income to be allocated in the most tax-effective manner among beneficiaries. This structure can take advantage of various personal tax rates to legally reduce the overall tax burden.
Asset Management and Protection.
Bucket companies can also be useful for managing long-term investments, such as shares or property. Although they don't receive the 50% Capital Gains Tax (CGT) discount that individuals get, they offer benefits such as asset protection and the potential for reinvestment, which can aid in financial growth and planning.
Simplifying Financial Management.
By using a bucket company, you can streamline how surplus business income is managed. This setup creates a clear pathway for income to move from the trust to the company, easing the financial management process, including audits and reviews.
Optimise your taxes today
Case Study
How Andrew, a Sydney-based business owner used a bucket company strategy to reduce his tax.
Andrew's Australian-based business earns a profit of $500,000 in FY24. If he were to receive this money as an individual, his tax liability would be $221,542 (44% effective tax rate) under the 2024 personal tax rate and Andrew would qualify for the highest marginal tax rate.
Using a bucket company, Andrew makes the decision to optimise this using a two-step process:
Andrew paid the first $45,000 to himself with $0 tax on the first $18,200 and 19% on the remainder.
Andrew then allocated the remaining profit to his bucket company, which is taxed at 25%.
Were Andrew to receive the income directly, that is, not via a bucket company, this is the following tax he would have to pay based on the personal tax rate:
$45,000 to $120,000: 32.5% tax
$120,000 to $180,000: 37% tax
Over $180,000: 45% tax, plus a 2% Medicare levy.
The total tax Andrew would have to pay without using a bucket company would be: $221,542.
However, the total tax Andrew would have to pay after implementing his bucket company structure would be: $119,417.
This presents a total savings of: $102,125.
Optimising Your Bucket Company Structure.
One way you can optimise your bucket company structure is to set up a separate trust to hold the company’s shares. This allows the trust to distribute dividends in a tax-effective manner and provides an additional layer of asset protection.
As the company accumulates profit, holding shares personally can expose individuals to legal risks. A separate trust shields these assets and offers flexibility in dividend distribution.
Reach out to us today to learn whether tailor the bucket company structure would suit your specific needs and unique situation.
What to Do with the Money in a Bucket Company.
Bucket companies as investment vehicles.
A bucket company can serve as an effective structure for holding long-term investments, effectively becoming an investment vehicle to generate additional income. When cash is transferred from a trust to the company, it can be invested in assets like listed shares, properties, or private investments.
Capital Gains Tax Considerations.
While a bucket company does offer tax benefits, given profits within the companty are taxed at the corporate rate of 25%, it's important to note that companies are not eligible for the 50% Capital Gains Tax (CGT) discount, unlike family trusts and individuals.
Next Steps.
It's important you seek professional advice to understand the most tax effective manner to structure your business entities. A bucket company strategy has its place in an effective tax planning strategy, but whether a bucket company is right for you ultimately depends on your unique situation and your personal and professional goals.
Our tax accountants have decades of experience helping their clients navigate their personal tax rate and optimise their own tax paid within the boundaries of what the Australian Taxation Office (ATO) allows. If you have a private company and pay the top marginal tax rate, but don't currently have a bucket company in place, it might be a good time to speak with us to learn whether you could have a more tax effective strategy in place.
FAQs.
About Causbrooks.
Causbrooks gives you a client manager supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business.
Get in touch with us to set up a consultation or use the contact form on this page to inquire whether our services are right for you.
Disclaimer.
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your 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!
