What is a bucket company and why would you use one

There are all sorts of wonderful tax minimisation strategies out there for businesses but at Day One Advisory, we believe your structure is the most important. If you don’t have the right foundation, you’ll miss out on excellent tax planning opportunities. The right structure should be appropriate for your unique circumstances while still providing flexibility so it can adapt and change as your business does.

One method to manage your tax liability is to use what we refer to as a ‘bucket company’.

A bucket company is just a normal pty ltd company, but its purpose is to hold profits to make the most of the flat tax rate. Once it’s got those profits it can either sit on the cash or it can invest the money.

Broadly speaking, we have two tax rate systems in Australia:

Once an individual earns over $180k, they are paying tax at 47% whereas a company is paying tax at 25%. This is a 22% difference which can really add up.

The benefit of a bucket company is that rather than paying tax at 47%, you may be able to limit the tax to 25%. Now, we have to note that that is a massive oversimplification and unfortunately, our tax system is never that easy so if you’re thinking about going down this path, get some advice and understand the consequences of distributing to a bucket company.

Businesses that are run through a trust or investors that hold their investments via a trust. Basically, you have to be able to distribute the profits to the bucket company, so a trust is required.

Usually, we see bucket companies used where a business is operated through a family trust and the business is earning enough money that the individual beneficiaries’ taxable incomes are above the $180k mark.

A bucket company can also form part of a structure where there is a trading company. Let’s say you’ve got two unrelated investors holding shares in a company that runs a business. If that company declares a dividend every year it will go through the family trust that holds the shares and then need to be distributed out to the beneficiaries of the trust. If you don’t need the cash personally or you’ve got income above $180k, you might choose to distribute the income to a bucket company.

There are additional costs that come with establishing and administering a company so you need to weigh up the cost/benefit and make sure it’s worth the extra dosh.

Bucket companies are a great tool to have when it comes to tax planning. They can help a business cap their current year tax liability at the flat company tax rate and can serve as an investment vehicle.