Did you know a bucket company can help minimise your tax and maximise wealth? Learn how this strategy could benefit you and your family.
Author: Joshua McDade | Director | HFB
A bucket company is a company that is set up as a beneficiary to a trust. The term 'bucket' is used because the company sits below your trust and is used to pour money into it to reduce tax.
This allows you to cap your tax payable at a corporate tax rate.
This also allows you to limit your personal taxable income, which may impact other factors such as the amount of childcare subsidy you receive, the amount of private health insurance rebate you are entitled to and the amount of child support you need to pay.
When a business trades through a trust, it must distribute its income to eligible beneficiaries each financial year. Most commonly, these distributions will be split between a husband and wife, or for those not in a relationship, the income may not be able to be split at all.
This income will then be taxed at personal marginal tax rates, which are as high as 47% (including Medicare Levy) for those in the highest tax brackets.
If this trading trust was to distribute its income to a bucket company instead, it would achieve a tax saving on that income of 17% (22% if the company qualifies as a base rate entity).
Asset protection is one of the key reasons a business owner may choose to structure their business as a proprietary limited company. However, over time a successful business will accumulate and retain meaningful amounts of profit and capital which increases the potential cost to shareholders associated with a risk event ie an unexpected loss or litigation.
This can be mitigated when a trading company clears its retained profit by way of dividends. This dividend then flows through the trust and into a bucket company.
The bucket company may then loan funds back to the trading entity if required to provide working capital.
This sequence of transactions changes the legal owner of the capital from the trading company to the bucket company.
As a result, the net assets of the trading company have been reduced and the exposure to the inherent risk of operating a business has been minimised.
The bucket company must manage its capital to provide a return for shareholders (you and your family).
A few examples of the type of investments that we see our clients bucket companies make are:
Generally, it is best to avoid allocating the capital of a bucket company toward personal expenses and personal assets that are not likely to provide a return on investment.
Anyone considering the establishment of a bucket company should first ask themselves ‘when do I want / need to access these funds’.
A bucket company can pay a dividend to its shareholders at any point, allowing you to pull money out of your bucket company when you need it.
These dividends will ultimately be taxed in your personal name, so where possible, you want to aim to take dividends from your bucket company in years where your income from other sources is lower than normal.
This might be during an extended break from work (ie maternity / paternity leave, break between jobs or perhaps a long family holiday).
The most common scenario we see is bucket companies being used to either bridge an early retirement or supplement existing retirement savings.
There are a couple of reasons why you might consider a bucket company to save for your retirement alongside your superannuation fund.
The most compelling reason is the ability to access your capital when you need it.
You will need to wait until you are 60 if you want to retire and access your super (and there is no certainty that this number won’t increase by the time you reach retirement age).
But what if you want to retire at say 50?
One strategy would be to work towards accumulating 10 years’ worth of living costs within your bucket company. At 50, you would then retire and replace your income with dividends from your bucket company.
This would get you through the next 10 years until you can access your super.
Hopefully this helps to give you a little more understanding of when and how bucket companies can assist you in minimising your tax and maximising your wealth.
We have included a few examples of how this strategy can be used, however there are many more ways in which this strategy can be tailored to maximise the benefit received by you and your family.
If this is of interest to you and you would like to learn more then please reach out to one of our friendly team members at HFB on teams@hfbgroup.com.au. We would love the opportunity to work through the above with you in more detail over a coffee.