Tax Tip 402: Bucket Companies Saving tax with Future Personal Income Tax Cuts

Diverting income to a company is a way to postpone excess tax to future years. The company will generally pay a 30% tax rate and the shareholder will pay tax when a dividend is paid out of the company in the future – but they will get a credit for any tax that the company has paid on that income.



This means using a bucket company to hold income in this financial year could result in less that payable in future years if the marginal tax rate of the taxpayer reduces. This is in addition to all the other tax benefits of using a bucket company.



Example

Homer operates a discretionary trust which makes $100,000 income. Homer’s personal income is $200,000 pa from working. So he causes the trustee to make a bucket company the recipient of the $100,000 income this year.

The company pays $30,000 in tax.

The following year the top marginal tax rate is reduced from 47% to 42% (nothing is planned like this as far as I know).

Homer immediately causes the company to pay a dividend to himself of $70,000 fully franked with $30,000 in franking credits.


A few weeks ago Homer would have paid 47% or $47,000 in tax on the trust income if it came to him.

This month in July it is a new financial year under new tax rates so if the company pays Homer a grossed up dividend of $100,000 he will only pay $42,000 in tax.

Using the bucket company tied the income up for a few weeks perhaps, but it saved Homer $5,000 in tax. He could probably save a lot more in tax by taking it out after he has quit his job and his marginal tax rate is much lower – but he can’t wait.

 

just remember if the distribution is from a trading trust then the income might be base rate entity income subject to a lower tax rate.