How a bucket company can save you tax

How a bucket company can save you tax.

A bucket company (also known as a corporate beneficiary) can be an effective tax-saving strategy, particularly for businesses and family groups operating through a discretionary trust. Here’s how it works and how it helps save tax:

Lower Tax Rate Compared to Individual Marginal Rates

In Australia, a discretionary trust (family trust) must distribute its income to beneficiaries each year, or it is taxed at the highest marginal rate (47%).
Instead of distributing profits to individuals (who may be taxed at up to 47%), the trust can distribute some or all of its profits to a bucket company.
A bucket company pays a lower corporate tax rate (currently 25% for base rate entities or 30% for larger companies), which is significantly lower than the top individual tax rate.

Deferring Personal Tax Liability

The bucket company holds onto the profits rather than distributing them to individuals immediately.
This allows individuals to control when they take dividends, helping manage personal taxable income and possibly reducing their tax liability in lower-income years.

Franking Credits on Dividends

When the bucket company eventually distributes dividends to shareholders, the distributions come with franking credits attached.
These franking credits can be used to offset personal tax obligations, reducing the overall tax burden.

Avoiding High Marginal Tax Brackets

If family members are already in high tax brackets, keeping profits in the bucket company at 25% or 30% prevents unnecessary tax at 37% or 47% (for individuals earning over $120,000 and $180,000, respectively).

Loaning Back to the Trust or Investing

The company can lend the money back to the trust or use the funds for investments.
However, care must be taken with Division 7A rules to avoid deemed dividends that could create tax issues.

Key Considerations

Division 7A Compliance: If the company distributes profits but then loans them back to the trust or individuals, it must comply with Division 7A loan requirements (interest and repayment terms apply).
Holding Funds in the Company: Funds retained in the company are taxed at 25%-30%, but if they are eventually paid out as dividends, shareholders will need to pay additional tax (minus franking credits).
Ongoing Management: A bucket company adds complexity, requiring separate tax returns and corporate governance.

How does it work? Example

Assume a trust earns $250,000 in profits from business.

OPTION 1

Distribute profits 50 / 50 to Individuals 1 and 2. Total tax (inc. Medicare Levy) payable = $61,576 (24.6%)*
*Figures accurate as at 25 Feb 2025

OPTION 2

Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company at a 25% tax rate. Total tax payable = $56,676 (24%).
(Note: This strategy assumes that the $70,000 in cash is available to be distributed to a bucket company, otherwise what is known as a Div 7A Loan Agreement will need to be entered into and loan repayments made over a 7-year period.)

The value of the example strategy

The value of this strategy is $4,900 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.

Important: 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 25%.

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