How to “Cap” the Tax on Trust Distributions using a “Bucket Company” – Save Tax!
In the lead-up to 30 June 2019, we want you to know why using a “bucket company” can be a great strategy for saving tax on trust profits distributed
PROFITS FROM A TRUST?
Do you have a Trust that generates profits? If yes, then read on!
A “bucket company” allows you to “cap” the tax on profits distributed by a trust to 30% or 27.5% This is much less than the individual top marginal rate of 47%!
Here’s how this works:
Assume a trust earns $250,000 in profits from business or investment.
Distribute profits 50 / 50 to Individuals 1 and 2.
Total tax (inc. Medicare Levy) payable = $72,494 (29%)
Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company at a 30% tax rate.
Total tax payable = $66,194 (26.48%)
Value of strategy using a “Bucket Company” is $6,300 in tax saved!
The cash in a “bucket company” can be used to invest in shares, property, or to lend to other entities at a specific interest rate.
But: You need to discuss this with us BEFORE you do it. There are different tax laws that affect the use of this strategy, and whether your “bucket company” can use a tax rate of 30% or 27.5%.
As your Accountants, we are very aware of these tax laws and can make this easy for you.
FAQs
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What is a Bucket Company?
- A Bucket Company is an entity used to cap the tax rate on profits distributed from a trust, usually at 30% or 27.5%. This strategy can be more tax-efficient than distributing profits directly to individuals, who may be taxed at higher rates.
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How does a Bucket Company save on taxes?
- A Bucket Company saves on taxes by allowing trust distributions to be taxed at the company tax rate (30% or 27.5%) instead of the higher individual marginal tax rates. This can significantly reduce the overall tax burden on the distributed profits.
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What are the tax rates for a Bucket Company?
- The tax rates for a Bucket Company are typically 30% or 27.5%, depending on specific conditions such as the company's turnover and status as a base rate entity.
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Can I use a Bucket Company for any type of trust distribution?
- While a Bucket Company can be used for many types of trust distributions, there are specific tax laws and regulations that govern its use. It's essential to consult with a tax professional to understand how these rules apply to your situation.
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What should I consider before setting up a Bucket Company?
- Before setting up a Bucket Company, consider factors such as your trust's income, potential tax savings, the costs of establishing and maintaining the company, and compliance with relevant tax laws. It's crucial to seek professional advice to ensure this strategy is suitable for your circumstances.
NEXT STEPS
Contact us TODAY! The sooner we get started, the sooner we can help you save tax – well before 30 June for sufficient time to implement tax saving strategies.
Imagine what you could do with your tax saved!
- Reduce your home loan
- Top up your Super
- Have a holiday
- Deposit for an Investment Property
- Pay for your children’s education
- Upgrade your Car
We look forward to helping you!
If you have any questions about this, please feel free to contact the team at Wiseman Accountants so we can assist you further.
Have you missed our other tax planning media releases? Not to worry – you can catch up here!