So this strategy actually requires you to have a trust that's earning income - that could be investment income or business income, it doesn't really matter too much, but the whole purpose of a bucket company is to receive the rest of the distribution from a trust.
When we're looking to distribute from a trust, we want to consider who are the best people in the family group (or entities) that you might have in the family group or superannuation (even churches and charities). But when we run out of people or entities that kind of make sense, if we're left with an amount of profit to distribute, then we want to consider a bucket company.
Now, the whole purpose of considering a bucket company is because companies pay a flat rate of tax. Unlike individuals where the more that an individual earns, the higher their tax rate - bucket companies pay a flat rate of either 26% tax if they're what's called a “base rate entity” or they're receiving directly from a business, or they're receiving business income directly from a discretionary trust. So you could be on the 26% tax rate from a bucket company, or you could be on a 30% flat rate of tax for a bucket company as well - It kind of just depends on your structure for that difference of 4%. The point to make here is that that might be a lot more attractive than paying 34.5% tax, 39% tax, or even 47% tax, which is our highest marginal tax rate for an individual.
Things to consider with a bucket company as well is that the cash actually has to move into the bucket company from the trust when it makes the distribution, or soon after, otherwise we might create what we call a “Division 7A loan”, which I'm not going to go into too much detail there, but it is important that you understand that cash actually has to move into that bucket company.
So make sure this is one you consider if you've got a family trust, and there's a balance to it. We want to make sure that you're not just distributing to a bucket company first, we want to make sure you've considered yourself, maybe your spouse, kids, parents and all the other family members, and then with anything that's remaining, we look to consider a bucket company. And this is something that we can assist you through our tax planning process, where we guide you on who are the people that might make sense and work through those options, and then we look towards maybe setting up a backup company to take the rest of that income.