A bucket company is a tax-efficient and strategic structure that businesses can use to maximise profits and structure their business and personal assets.
The term 'bucket company' is used because it sits beneath your business and 'catch' the profits you determine are not payable to you, saving you and your business money on taxes.
A bucket company is also used by individuals to pay dividends to shareholders in a secure manner that protects the wealth accumulated through the business's hard work.
Understanding what a bucket company is and how it can benefit your position is smart business, and it can only be enhanced by engaging with a financial planner.
A financial planner will examine both your business and personal finances to determine how they can be best structured with a bucket company and many other strategies that improve both your business earnings and your long-term financial position for you, your family, and your retirement fund.
This is done to save tax, so you don't pay the individual tax rate on all of your earnings; rather, the money paid to the bucket company is taxed only at the corporate tax rate.
Resident tax rates 2022–23r example, if your company's profit was $270,000, you'd be taxed at 47% on anything over $180,000, or $90,000 in this case, making tax payable on this portion of income $42,300. If this money was instead directed to a bucket company, it would only be taxed at the corporate tax rate of 30%, or $27,000 in this case.
As you can see, with a bucket company and a deliberate structure for where your money goes based on your needs, you could save a total of $15,300 in the tax year.
What Is A Bucket Company and How Can A Financial Planner Help?
As previously discussed, a bucket company is a tax mechanism that is typically recommended by accountants in relation to your business and personal tax position.
However, we find that far too few people have a strategy that integrates their business structures with their personal financial plan.
At WE. we believe that your business and personal strategies should be consistent and cared for with a unified strategy that you, the client, establish in consideration of your business and personal goals and desires.
Your financial planner will consider important aspects and distinctions of establishing a bucket company, such as how to distribute to a bucket company while keeping your personal income needs and tax situation in mind. This will be completed in collaboration with your Accountant.
Once a suitable amount has been determined, you must deposit the physical funds into the bank account of the bucket company that you selected before filing your tax return.
If you are unable to pay this amount by the time you file your tax return, you may be able to establish a Division 7A Loan.
A Division 7A Loan Defined
A Division 7A loan is commonly used by business owners when their company is expanding and profits are high, but cash has been reinvested in the company's growth.
When this is applicable, your accountant will file an application with the ATO on your behalf, which will allow you to repay the loan between yourself as a sole trader, partner, or trust and the bucket company over a seven-year period, with interest charged at a benchmark rate.
What To Do With The Bucket Company's Money
The question is what to do with the funds once they have been received by the bucket company. One option is to use the bucket company as a long-term investment vehicle for retirement.
Because investment earnings are taxed at the company tax rate of 30% and franking credits are accrued on tax paid, this can be a highly tax-efficient strategy.
With a well-planned strategy, it is possible to draw down on the accumulated balance in retirement, when doing so is often the most tax efficient.
If you want to extract money from a bucket company, you must go through the company's elected shareholders, which means that dividends must be paid to the as a percentage of the shareholder.
If these are distributed to individuals, the dividends can be divided in a fairly limited manner.
As a result, in order to receive dividends in the most tax-efficient manner possible, it may be necessary to establish another trust to hold the company's shares.
Furthermore, because the dividend was taxed at the company tax rate, the shareholder is entitled to a franking credit for the tax already paid.
This also benefits the business owner because dividends paid into the company trust provide additional protection for their assets when compared to holding these assets personally.
Profits paid into the bucket company are an ideal structure for long-term investment because the bucket company can invest in stocks, real estate, and other private investments.
While we have gone into detail about what a bucket company is and how it can improve your business earnings and thus your overall financial outcomes, we have only scratched the surface here.
WE. Are Here To Help.
If you have any further questions about whether this tax and investment system is right for you and your business, contact one of our financial advisors to discuss your options, after all good fortune requires great planning.