Asset protection strategies are essential for every business owner in Australia, and using a bucket company is one of the most effective ways to shield your business wealth. Many business owners worry about how to protect as much business income as possible from unexpected risks and high tax rates. This article explains how a bucket company structure works, how it can help minimise your tax, and why it’s a smart move for long-term financial security.
We’ll cover what a bucket company is, how it fits into your overall tax planning strategy, and the practical steps for setting up a bucket. You’ll also learn about the tax benefits, how to distribute income in the most tax effective manner, and how to ensure you meet your tax obligations under Australian tax laws. By the end, you’ll understand how to use a bucket company to save tax and protect your business income moving forward.
What Is a Bucket Company and How Does It Work?
A bucket company is a type of investment company set up as a corporate beneficiary of a family trust. The trust can then distribute income to the bucket company, where it is taxed at the lower corporate tax rate instead of your own personal tax rate. This is a key part of a tax planning strategy for business owners who want to minimise tax and protect their business income.
When using a bucket company, you can cap the tax rate on distributed profits at either 25% or 30%, depending on the company tax rate that applies. This is much lower than the highest marginal tax rate for individuals. The bucket company can then pay dividends to shareholders in the future, and those dividends may come with franking credits for tax already paid.
How the Bucket Company Structure Works
Here’s how a typical bucket company strategy is set up:
The family trust earns business income during the financial year.
Instead of distributing all the trust’s income to individuals, the trust distributes some or all of the net income to the bucket company as a corporate beneficiary.
The bucket company pays tax on this income at the company tax rate.
The profits can be kept in the company for long term investments or paid out as dividends to shareholders later.
This approach allows you to distribute profits in the most tax effective manner and protect those profits from personal risks.
Meeting Legal and Tax Requirements
Setting up a bucket company means following the rules set out in the Income Tax Assessment Act and other tax laws. The company must be properly registered, have at least one Australian resident director, and be included as a beneficiary in the trust deed. It’s also important to make sure all distributions and loans comply with Division 7A, which covers how company beneficiaries pay tax and how unpaid present entitlements are treated.
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The Tax Benefits of Using a Bucket Company
The main tax benefit of a bucket company is the ability to cap the tax rate on trust distributions at the lower corporate tax rate, rather than your own personal tax rate. This can result in significant tax savings, especially if your business generates a healthy profit each year.
For example, if your trust’s income is distributed directly to you and you’re already earning a high income, you could be paying tax at the highest marginal tax rate. By distributing some of that income to a bucket company, you only pay tax at the flat tax rate for companies, which is currently 25% for many small businesses.
Managing Tax Paid and Dividends
When the bucket company pays tax on distributed income, this tax paid is recorded and can be used to provide franking credits when the company pays dividends to shareholders. This means that when you eventually withdraw funds from the company, you may be able to reduce your tax liability by claiming those franking credits in your tax return.
Planning for Carried Over Tax Losses
If your bucket company has carried over tax losses from previous years, these can offset future taxable income, further reducing the tax payable. This is another way to use a bucket company to save tax and invest profits in a tax effective manner.
Asset Protection Advantages of a Bucket Company
Beyond tax savings, a bucket company provides strong asset protection for your business wealth. By moving profits out of your trading business and into a separate investment company, you create a legal barrier between your business operations and your accumulated wealth.
This means that if your trading business faces legal claims or creditors, the profits that have been distributed to the bucket company are generally protected. The bucket company holds these funds separately, and they are not at risk from business debts or lawsuits against the trading entity.
Keeping Business and Private Investments Separate
A bucket company can also act as a vehicle for private investments, such as shares, property, or other assets. By holding these investments in the company, you keep them separate from your trading business and personal assets, adding an extra layer of protection.
Protecting Against Personal Risks
If you face personal risks, such as divorce or personal guarantees on loans, the assets held in the bucket company are usually out of reach, provided the structure is set up correctly and managed according to the law.
Practical Steps for Setting Up a Bucket Company
Setting up a bucket company involves several key steps, and it’s important to seek professional advice to ensure everything is done correctly. Here’s a straightforward guide to getting started:
Register the Company: Set up a proprietary limited company with at least one Australian resident director and a registered office address.
Update the Trust Deed: Make sure your family trust deed allows for a corporate beneficiary and includes the new company as a beneficiary.
Plan Income Distribution: Decide how much of the trust’s income will be distributed to the bucket company each financial year, taking into account the most tax effective manner for your family members and business.
Comply with Division 7A: If the bucket company lends money to shareholders or related parties, make sure to set up a minimum annual repayment plan to avoid extra tax.
Manage Investments: Invest the company’s income in long term investments, such as shares or property, while keeping an eye on the mix of income to maintain the lower corporate tax rate.
Ongoing Tax Obligations
Each year, the bucket company will need to lodge a tax return and pay tax on its taxable income. If the company pays dividends, it must keep track of franking credits and ensure these are reported correctly. Regular reviews help ensure you stay compliant with the Australian Taxation Office and make the most of your tax minimisation strategy.
Using a Bucket Company for Investment and Wealth Building
Once your bucket company is set up and receiving trust distributions, you can use it as an investment company to build wealth for the future. The company can hold a variety of assets, including shares, property, and other investments, and reinvest profits in a tax effective manner.
Making the Most of Dividend Income
When the bucket company pays dividends to shareholders, those dividends may come with franking credits for the tax already paid by the company. This can reduce the overall tax burden for shareholders, especially if their own personal tax rate is lower than the company tax rate.
Planning for Capital Gains
It’s important to remember that companies do not receive the capital gains tax discount that individuals and trusts enjoy. This means that capital gains realised by the bucket company are taxed at the full company tax rate. When planning investments, consider the mix of income and capital gains to ensure you are investing in the most tax effective manner.
Why Business Owners Need Asset Protection and Tax Planning
Running a business comes with many challenges, and protecting your wealth is one of the biggest. Without the right strategies, your hard-earned profits can be at risk from creditors, lawsuits, or even personal life changes. On top of that, the highest marginal tax rate in Australia can take a large chunk out of your net income, especially when you include the Medicare levy.
It’s not just about keeping your money safe—it’s also about making sure you don’t pay more tax than necessary. Many business owners find that distributing all their trust’s income directly to family members or themselves pushes them into a higher personal tax rate, which increases the total tax paid. That’s where a bucket company strategy comes in.
The Risks of Not Having a Plan
If you don’t have a solid asset protection and tax minimisation strategy, you could lose business wealth to unexpected claims or pay more tax than you need to. Distributing all your business income to individuals can mean paying tax at the highest marginal tax rate, which can be as high as 47% with the Medicare levy. This leaves less money for long term investments, business growth, or your family’s future.
Why Traditional Approaches Can Fall Short
While insurance and basic company structures offer some protection, they don’t always separate your business profits from personal risk. If your business faces a legal claim, all the profits sitting in the same company could be at risk. Plus, distributing income in the wrong way can lead to unnecessary tax payable, reducing your overall tax savings.
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Common Questions About Bucket Companies
Many business owners have questions about how bucket companies work in practice. Here are some answers to common queries:
Can I Access the Money in My Bucket Company?
Yes, but there are rules. If you want to take money out of the bucket company, you can pay dividends to shareholders. Keep in mind that these dividends may be taxed at your own personal tax rate, but you can use franking credits to offset some of this tax.
What Happens if I Don’t Pay Out All the Profits?
Profits can be retained in the bucket company for future investment, but if the company lends money to shareholders or related parties, you must follow Division 7A rules and set up a 7a loan with a minimum annual repayment plan to avoid extra tax.
How Do I Make Sure I’m Compliant?
It’s important to keep accurate records, lodge all required tax returns, and seek professional advice to make sure you meet all your tax obligations. The Australian Taxation Office regularly reviews trust distributions and company structures, so staying compliant is essential.
Conclusion
Using a bucket company is a practical way for business owners to protect their wealth and minimise tax without sacrificing profit or taking unnecessary risks. By distributing business income to a corporate beneficiary, you can cap your tax rate, save tax, and keep your profits safe for future investment. The key is to set up your bucket company properly, manage distributions in the most tax effective manner, and stay on top of your tax return and compliance requirements.
If you’re ready to take control of your business wealth and want to distribute profits in a way that reduces your tax burden, consider whether a bucket company strategy is right for you. Seek professional advice to make sure your structure fits your needs and gives you peace of mind for the years ahead.
How confident are you that your current approach is protecting your business wealth in the most tax effective way? Now is the time to review your strategy and take the next step toward financial security.
