What is a bucket company?

Bucket Company refers to a Pty Ltd Company that is commonly used as recipient of trust distributions to hold excess cash. This is possible as the company w

ould be set up to be an eligible beneficiary of an existing discretionary (family) trust. This enables the Trustee to distribute Trust Income to the company.

Let’s look at an example

Let’s say our Trust earns rental income. Now, having a Bucket Company as an eligible beneficiary of a family trust allows the trustee to make distributions to the Bucket Company, which will be taxed at 30%.

The income will then exist in the Bucket Company until the Bucket Company decides to release the profits to its shareholder(s) by way of a dividend.

This is especially useful when all other beneficiaries are on a marginal tax rate that is higher – starting from the 34.5% tax bracket.

The general principle is that the net income of a trust is taxed at the hands of the beneficiaries. Individuals and company beneficiaries pay tax on their portion of the trust’s income at the rates that apply to them.

Currently, the highest marginal tax rate for individuals (including Medicare levy) is 47% for people with a taxable income of $180,000 or more. For passive income companies, there is a flat tax rate of 30% (or 27.5% if the small business tax rates apply).

So, other things being equal, the current difference between these two tax rates is at least 17%. On the same income distribution, say $100,000, a corporate beneficiary would pay at least $17,000 less tax. While corporations do not have a minimum tax threshold due to the flat rate of tax, most individuals have a marginal tax rate over 30%. The 32.5% marginal tax rate currently kicks in at $37,001.

Other considerations

There are also many other uses but they will not be covered in this fact sheet. You should first consult a professional and consider the purpose, business risks and tax risks involved in your existing structure. Please contact us to walkthrough your individual circumstance.

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