Save Tax – “Cap” tax using a “bucket company”

In the lead up to 30 June 2020, we want you to know why using a “bucket company” can be a great strategy for saving tax on trust profits distributed.

PROFITS FROM A TRUST?

Do you have a Trust that generates profits? If yes, then read on! 


A “bucket company” allows you to “cap” the tax on profits distributed by a trust to 30% or 27.5%. 


This is much less than the individual top marginal rate of 47%! Here’s how this works:

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

Option 1: Distribute profits 50 / 50 to Individuals 1 and 2. Total tax (inc. Medicare Levy) payable = $72,434 (29%)

Option 2: Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company at a 27.5% tax rate. Total tax payable = $62,284 (25%). (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 this strategy is $10,150 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. 

But: 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 27.5%. 

As your Accountants, we are very aware of these tax laws and can make this easy for you.

 

 

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