Do you have a Family Trust? Learn how to save tax now
“Cap” tax using a “Bucket Company”
Using a “bucket company” can be a great strategy for saving tax on trust profits distributed. If you have a Discretionary or Family Trust that generates profits, this strategy may apply to you.
A “bucket company” is a company that is set up as a beneficiary to a trust, which allows you to “cap” the tax on profits distributed by a trust to 30% or 26%. 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.
Option 1: Distribute profits 50 / 50 to Individuals 1 and 2. Total tax (inc. Medicare Levy) payable = $67,574 (27%)
Option 2: Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company at a 26% tax rate. Total tax payable = $59,074 (24%). (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 $8,500 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 affecting the use of this strategy and whether your “bucket company” can use a tax rate of 30% or 26%.
As your Accountants, we are very aware of these tax laws and can make this easy for you.
Avoid extra tax with a Trust Distribution Resolution
In the lead-up to 30 June 2021, you need to complete your trust distribution resolutions before 30 June to avoid paying extra tax of up to 47% of Trust profits.
How can this happen?
If a Trustee of a Trust fails to make a resolution to distribute the income of the Trust before the end of the financial year, the Trustee may be assessed by the Australian Taxation Office (ATO) on the Trust income at the highest marginal tax rate of 47%, rather than the intended beneficiaries being taxed at generally much lower tax rates.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from your accountants at KMT Partners. Information is current at the date of issue and may change.
Contact us today on 08 8431 0022. The sooner we start preparing your 2021 Trust Distribution Resolutions, the sooner we can implement tax saving strategies for you.
A Guide To Minimise Your Business Tax 2021
Here is our tax minimisation guide available for you to download for FREE. This guide outlines strategies and tips to assist you with considering how to minimise your business tax.