Hi guys , Seeking your guidance if possible as I’m struggling to wrap my brain around it. I have read a lot about bucket companies and the initial benefits from a tax perspective if you are a self employed but ultimately when the retained earnings need to come out of the company you need to pay top up tax if on the higher income band which makes sense. My question is if you have a trust say distribute to a bucket company 200k and 27.5 per cent tax is paid this leaves retained earnings say of 145k in the balance sheet of the business. Say the following year this is fully paid out to the shareholder will the amount of top up tax on the shareholders personal tax position be based on the 145k with the franking credits attached or the 200k initially distributed to the company and tax has already been paid on it? Just trying to understand if any benefit at all actually exists or not aside from a cash flow perspective initially. many thanks.
The grossed up amount would be taxed in the hands of the shareholder but they would get a credit for the tax paid. I think unlikley most bucket companies would pay tax at 27.5%
Thanks but if it’s a corporate company I thought the tax rate is 27.5? So would I have to pay the top up tax on the 200k or 145k? thanks again terry.
Thanks terry. So even though the retained profits in year 2 would be 145k I would pay the too up tax on the 200k. I guess as I said earlier bucket companies only good for cash flow and timing really. thanks again.
To get the 27.5% it would need to pass several tests. One of which is something like that less than 80% is from passive income - suspect no bucket company passes this so would get the full company tax rate (30%). Jason
The potential benefit in the bucket company would be to delay the income until your tax rate is lower - ie. Stop working full time, have other beneficiaries (assuming the shares of the bucket company are held by a discretionary trust) with lower income/tax rates. Regards, Jason
You would pay tax on $200k but would get a credit for the $60k the company had paid so at worse 17% top up tax
I would be checking that personal services income is not involved. When I read comments about "self employed persons using a company or trust" it raises a question concerning PSI.