What Is a Bucket Company? How Corporate Beneficiaries Help Australian Family Trusts Save Tax
Many business owners using family trusts in Australia are surprised by how much tax they pay as their business income grows. Without the right tax planning, your tax liability can quickly climb, especially as you move into higher marginal tax rate brackets. One practical tax minimisation strategy is using a bucket company structure.
Understanding Bucket Companies in Australia
Let’s start by answering the question: what is a bucket company? In simple terms, a bucket company is a company set up to act as a corporate beneficiary of your family trust. The trust can distribute income to this company, which then pays tax on that income at the company tax rate, rather than your own personal tax rate. This approach can help you effectively minimise your tax payable and manage your tax obligations in line with Australian tax laws.
A bucket company is not owned by the trust but is included as a beneficiary under the trust deed. This means that after individual beneficiaries (such as family members) have received distributions up to the most tax effective thresholds, any remaining net income can be distributed to the bucket company. This strategy allows you to cap the rate of tax on excess trust income at the lower corporate tax rate, rather than the highest marginal tax rate that might apply to individuals.
Are you unsure if a bucket company fits your trust structure?
Schedule a complimentary consultation with us today to ensure your trust is compliant and tax-efficient.
How Bucket Companies Work with Family Trusts
To use a bucket company strategy, you need to ensure your trust deed allows for a corporate beneficiary. Most modern trust deeds are designed this way, allowing related entities such as companies you control to become beneficiaries. Setting up a bucket company involves registering a new company, often with family members as directors or shareholders, and adding it as a beneficiary to your trust.
Once your bucket company is in place, your family trust can distribute income to it at the end of each financial year. The company then pays tax on this income at the flat tax rate for companies, which is currently 25% for base rate entities or 30% for other companies. This is usually much lower than the personal tax rate you’d pay if the income was distributed to you directly, especially if you’re already in a higher tax bracket.
For example, if your trust’s income is $300,000, you might distribute enough to individual beneficiaries to keep their personal tax rate below the company tax rate, and then send the rest to the bucket company. This helps you minimise your tax and ensures tax is paid at the most tax effective rate.
Tax Benefits of Using a Bucket Company
The main tax benefit of using a bucket company as a corporate beneficiary is the ability to cap your tax liability at the lower company tax rate. In Australia, companies pay a flat tax rate-either 25% or 30% depending on their status-while individuals can pay up to 47% (including the Medicare levy) at the highest marginal tax rate. By distributing excess trust income to a bucket company, you can achieve significant tax savings.
This strategy is especially useful when your business income is higher than what can be distributed to individual beneficiaries at the lower marginal tax rates. By using a bucket company, you avoid pushing yourself or your family members into higher tax brackets and paying more tax than necessary. The company can also retain earnings for future investment or pay dividends to shareholders in later years, potentially when their personal tax rate is lower.
Legal and Compliance Considerations
When using a bucket company structure, it’s important to comply with the Income Tax Assessment Act and related tax laws. One key rule is Division 7A, which deals with loans and unpaid present entitlements (UPEs) between trusts and private companies. If your trust distributes income to a bucket company but doesn’t actually pay the cash, this can be treated as a loan, and you’ll need to set up a minimum annual repayment plan to avoid extra tax.
To stay compliant, always ensure that distributions to your bucket company are either paid in cash or properly documented as a 7A loan with the required interest rate and repayments. This helps you avoid unexpected tax payable and keeps your tax planning on track.
It’s also important to remember that the company must include the distributed income in its tax return and pay tax at the applicable company tax rate. If the company later pays dividends to shareholders, franking credits can help reduce the tax paid by those individuals, depending on their own personal tax rate and carried over tax losses.
Practical Steps for Setting Up and Using a Bucket Company
If you’re considering setting up a bucket company, here’s how to get started:
Review your trust deed to confirm that it allows for a corporate beneficiary.
Register a new company with ASIC, appointing appropriate directors and shareholders (often family members or related entities).
Add the company as a beneficiary to your family trust.
Each financial year, work with your accountant to decide how much business income to distribute to individual beneficiaries and how much to send to the bucket company for the most tax effective outcome.
Ensure that any trust distributions to the company are either paid in cash or managed with a compliant 7A loan agreement, including a minimum annual repayment plan and the correct interest rate.
By following these steps, you can use a bucket company to distribute income from your trust in a way that helps you minimise your tax, meet your tax obligations, and support your long term investments or private investments.
Common Mistakes and How to Avoid Them
While using a bucket company can be very tax effective, there are a few common mistakes to watch out for:
Not paying out trust distributions to the company, which can trigger Division 7A issues.
Failing to lodge the company’s tax return on time or include all taxable income.
Not setting up a proper 7A loan agreement when needed, which can lead to extra tax being assessed.
Overlooking the need to deduct expenses or manage capital gains within the company.
Forgetting to consider how franking credits and carried over tax losses can affect the tax paid when the company pays dividends to shareholders.
To avoid these pitfalls, always seek professional advice from a qualified accountant who understands the latest tax rulings and can help you implement the most tax effective bucket company strategy for your situation.
Asset Protection and Other Benefits
Besides tax minimisation, a bucket company can also provide asset protection. By holding retained earnings and private investments in a separate company, you can help shield these assets from risks associated with your main business or trust activities. This structure can also make it easier to manage long term investments, pay dividends, and plan for future financial objectives.
Conclusion
A bucket company is a practical tool for business owners using family trusts to effectively minimise tax and manage their tax liability in Australia. By distributing trust income to a corporate beneficiary, you can cap your tax at the lower corporate tax rate, avoid the highest marginal tax rate, and keep more of your business income working for you. Just remember to follow the rules around Division 7A, unpaid present entitlement, and company tax returns to stay compliant and enjoy the full tax benefits.
If you’re interested in using a bucket company structure or want to review your current tax planning, seek professional advice to ensure your strategy is tailored to your needs and meets all legal requirements. Making the right moves now can lead to significant tax savings and support your financial goals for years to come.