Maximizing Tax Efficiency: Should Your Business Consider a Bucket Company?

Should Your Business Consider a Bucket Company?

Business owners, particularly those operating family businesses, frequently ask whether incorporating a bucket company into their tax strategy is a smart move—especially when their business generates substantial income. So, what exactly is a bucket company, and how can it help with tax planning?

What is a Bucket Company?

A bucket company serves as a corporate beneficiary of a trust, sitting below it in the structure—hence the name “bucket.” It provides a way to hold trust distributions to reduce personal tax liability. Instead of individuals being taxed on their distributions at personal income tax rates, which in Australia currently range up to 45%, the company retains the income. Companies, on the other hand, are taxed at lower rates, typically between 25% and 30%, depending on their classification.

Australia’s individual tax brackets are expected to change from 1 July 2024, with proposals to:

- Lower the 19% rate to 16%

- Drop the 32.5% rate to 30%

- Increase the threshold for the 37% rate from $120,000 to $135,000

- Raise the threshold for the 45% rate from $180,000 to $190,000.

In contrast, companies considered "base rate entities"—those with annual turnovers under $50 million and earning at least 20% of income from active business—are taxed at 25%. Non-base rate entities face a 30% tax rate. Given the gap between individual and corporate tax rates, using a bucket company can significantly improve tax outcomes.

What Can You Do with Funds in a Bucket Company?

A bucket company allows you to hold long-term investments like property or shares, providing an additional income stream. However, it’s essential to note that while individuals can enjoy a 50% capital gains tax (CGT) discount on assets held for over 12 months, companies do not have access to this benefit.

How to Set Up a Bucket Company

To establish a bucket company, the trust that generates income must allow a company to be a beneficiary. The process of incorporating the company follows the usual steps, but careful consideration must be given to the appointment of directors and shareholders.

Business structure using a bucket company

Withdrawing Money from a Bucket Company

While bucket companies are typically set up for long-term investments, you might want to withdraw money at some point. There are three primary ways to access funds:

1. Division 7A Loans – Loans made from the company to shareholders, which must comply with strict regulations to avoid being taxed as dividends.

2. Dividends – Paying dividends to shareholders requires consideration of franking credits and tax implications based on ownership.

3. Discretionary Trust – A separate discretionary trust can receive dividends, offering flexibility in distributing profits according to the trust deed.

Pros and Cons of a Bucket Company

Advantages:

- Asset protection

- The ability to distribute profits within a family business group

- Tax savings with earnings capped at the corporate tax rate

- Flexibility in managing wages and tax planning for family members

- Investment opportunities with added protection for assets

Disadvantages:

- Assets may still be exposed to some risks

- Dividends may not always be the most tax-efficient way to distribute profits

- No access to the 50% CGT discount for long-term investments

- Initial setup and ongoing administration can be costly

- Financing might be more expensive or difficult to obtain

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At Tim Cook Tax, we specialize in helping businesses navigate complex tax strategies like bucket companies. Our expert team can assist in determining whether this approach suits your specific circumstances and ensure that your structure is compliant and effective. From setting up the trust and company to providing ongoing advice on managing distributions, we are here to guide you every step of the way. Let us help you create a tax-efficient strategy tailored to your business's growth and success.