Bucket companies are familiar with wealth-building strategies, particularly as individuals approach retirement. By distributing profits to a bucket company, individuals can benefit from reduced tax liabilities and enhanced investment growth opportunities. This essay explores how bucket companies influence wealth building at retirement, their impact on age pension eligibility and tax positions, and strategies to maximise economic outcomes.
A bucket company is used to receive distributions from a family trust. Instead of distributing profits directly to individuals, which may attract high marginal tax rates, the trust distributes income to the bucket company, which is taxed at the corporate tax rate (currently 30% or 25% for base rate entities). The company can then retain the after-tax profits for reinvestment or distribution.
Using a bucket company can result in significant tax savings compared to personal marginal tax rates, reaching up to 47% (including the Medicare levy). Retained earnings within the bucket company are taxed lower, allowing more capital to compound over time.
Example of Tax Efficiency:
Income DistributedPersonal Marginal Tax (47%)Bucket Company Tax (25%)Savings$100,000$47,000$25,000$22,000
Over 20 years, if the tax savings of $22,000 per year are reinvested at an annual return of 7%, they would accumulate to approximately $1,012,000.
The age pension is subject to both an income test and an assets test. Holding wealth in a bucket company can impact these tests:
Strategic use of the company can help individuals control their assessable income, potentially increasing their age pension entitlement.
By deferring distributions from the bucket company until retirement, individuals can benefit from lower marginal tax rates or effectively use franking credits.
Using franking credits from company-paid tax can reduce personal tax liabilities when distributed dividends.
Reinvesting retained earnings within the bucket company in diversified assets can enhance compounding returns.
Strategically distributing income to lower-income family members before reaching the bucket company can reduce overall tax.
Carefully planning an exit strategy to wind up the bucket company or sell its assets can minimise capital gains tax liabilities.
Assume that John and Mary, aged 65, have distributed $100,000 annually from their family trust to their bucket company over 20 years.
YearAnnual ReinvestmentTotal Accumulated Amount (7% p.a.)5$75,000$435,30010$75,000$1,068,91420$75,000$3,867,854
At retirement, they can distribute dividends with franking credits to minimise personal tax and supplement their income while potentially qualifying for some age pension benefits due to strategic income timing.
Borg & Salce Accountants