Join Australia's most dynamic and respected property investment community

Tax Tip 108: Using Bucket Companies to Save Tax

Discussion in 'Accounting & Tax' started by Terry_w, 8th Apr, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,959
    Location:
    Sydney
    A 'bucket company' is a company which is set up merely to receive income from trusts. It will not trade or do business, but just accumulate income.

    Tax rates for companies (that are not small business entities) is currently 30%. This is often lower than the tax rate paid by individuals, which is the first benefit.

    Another benefit of companies over trusts is that the company can retain income. It doesn't have to be distributed each year. A trust can also retain income, if the deed permits, but the top tax rate will apply.

    Another benefit is the franking credits. A company can pay tax on income and then distribute this income to the shareholders who then get a credit for the tax paid by the company, so that the same income is not taxed twice.

    Because of these benefits a 'bucket' company can help a family save tax, especially where their marginal tax rates will decrease in future years.

    Example
    Naomi is a keen investor and has set up a discretionary trust to benefit her family. The trust has positive income of $40,000 per year from property rents. Naomi and her spouse John are both employees on the 37% tax bracket. Next year they decide they will have a year off and live in a cave, in meditation. Instead of distributing money from the trust to themselves this year they may consider whether they could set up a company and have this company be a beneficiary of the trust. The trustee could then distribute the income to the company. The company would pay tax at 30% - which is less than what they would be paying.

    Next financial year they would come out of hibernation for a day or so to cause the company to pay a franked dividend to themselves, about $20,000 each which would mean nearly no tax is payable. They would get the tax back that the company paid because of the franking credits.

    By doing this they would have saved $40,000 x 37% = $14,800 plus the Medicare levy which would have been another $800 = $15,600. They may also get a low tax offset of $343 each which would cancel out the tax they would have paid of $342 for being over the threshold.

    Also have a look at my tip in the legal section, Legal Tip 93: Bucket Companies as Beneficiaries of Trusts
     
    Hodor and oracle like this.
  2. Blacky

    Blacky Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    1,103
    Location:
    Bali
    One thing to note though Terry would be that the distribution of income is proportionate among shareholders (that is a distribution per share held).
    Therefore if you have a husband and wife, with equal shares, the dividends will be equal. If ownership is 70/30 then that is the distribution.

    If, for example, you know your wife will leave work next year you can't apportion more income to her in the lower tax bracket. Unlike in trusts which the income can be discretionary.

    But yes, being able to decide when to distribute income can be highly beneficial.

    Blacky
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,358
    Location:
    Sydney
    Unless the Co shareholding is a discretionary trust AND there are human beneficiaries capable of utilising tax thresholds and marginal rates.

    Many catches to using a "bucket company". First is that the company must receive the actual distribution. Second problem is what it then does with it. Full and final tax almost always has to end with a human, a company that accumulates or with a loan that poses a concern.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,959
    Location:
    Sydney
    Good to point that out. Dividends go to shareholders in proportion to ownership. I would usually suggest a discretionary trust own the shares so the trustee can then decide which beneficiaries of the trust will end up with the dividends.
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,358
    Location:
    Sydney
    If they are resident adult taxpayers. Otherwise all sorts of issues such as withholding tax, trustee distribution tax, exempt income, s99/s99A concerns etc.
     
    Terry_w likes this.
  6. mrdobalina

    mrdobalina Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    990
    Location:
    On the ski slopes
    How long can the income be retained in the bucket company, before it has to be distributed out as franked dividends?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,959
    Location:
    Sydney
    I don't believe there are any limits - but laws tend to change.