Using a Bucket Company to Streamline Family Trust Distributions

By Jaye Mankelow
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Family trusts are commonly used to manage, protect, and grow family wealth, especially when the trust holds income-generating investments or business interests.

A bucket company, when added to a family trust structure, can help streamline income distribution by managing and capping taxable income at a lower corporate tax rate. This approach allows the family trust to distribute income tax-effectively, reducing the overall tax burden on distributed earnings. Here’s how a bucket company can be incorporated to optimise income distribution within a family trust.

What is a Bucket Company?

A bucket company is a corporate entity that can receive income distributions from a family trust. Particularly useful for managing income that might otherwise be taxed at high individual rates, the bucket company holds distributed income, which is then taxed at the corporate tax rate (currently 30% for large companies or 25% for base-rate entities). This setup can provide significant tax savings for family members in higher tax brackets.

• Role in a Family Trust Structure: Within a family trust, the bucket company acts as a “holding account” for income distributions that would otherwise push beneficiaries into higher tax brackets. This structure can help preserve the family’s wealth by reducing overall tax exposure.

Example: A family trust distributes $200,000 of income in a given year. By directing $80,000 to a bucket company, the trust effectively reduces the amount taxed at individual rates, leveraging the lower corporate tax rate on a portion of the income.

Key Tax Benefits of Using a Bucket Company

Adding a bucket company to a family trust structure offers multiple tax advantages, particularly in terms of capping taxable income and controlling the overall tax impact of distributions.

• Corporate Tax Rate Application: Income directed to the bucket company is taxed at the corporate rate, often lower than individual tax rates, especially for high-income beneficiaries.
• Income Streaming Flexibility: A bucket company offers trustees the flexibility to allocate income more strategically, avoiding high marginal tax rates for beneficiaries. By diverting excess income to the bucket company, trustees can manage income distributions without pushing family members into the top tax brackets.
• Deferred Taxation and Income Management: A bucket company can retain undistributed income, allowing for deferred distribution to individual beneficiaries in future years when their marginal tax rates may be lower.

Example: If a high-income beneficiary is expecting a reduction in income, the bucket company can retain income until the beneficiary’s tax rate drops, minimising the effective tax on that income.

Operational Considerations for Using a Bucket Company

Using a bucket company as part of a family trust structure requires careful planning and adherence to regulatory obligations to ensure compliance.

• Annual Tax Return and Financial Reporting: The bucket company must file an annual tax return and complete financial statements. This reporting ensures transparency for income received from the trust and allows for proper tax treatment under ATO guidelines.
• Loans and Accessing Funds: Profits within the bucket company can be loaned back to the trust or family members, provided they follow Division 7A-compliant loan agreements. These loans need to be structured correctly to avoid unintended tax implications and ensure compliance with Division 7A rules, which govern loans from private companies to shareholders or associates.

Tip: Consulting with an accountant is essential to maintain accurate financial reporting, structure loans effectively, and comply with Division 7A to optimise the tax benefits of a bucket company.

Additional Note: Aspira ProfitGuard Strategy

While the bucket company structure itself provides valuable tax management for family trusts, the ProfitGuard Strategy from Aspira applies specifically to trusts distributing excess cash from trading entities. In this approach, a bucket company is used to efficiently manage cash and limit risk for active trading businesses by distributing profits through a family trust. This separate strategy focuses on asset protection and streamlined cash management for trading entities.

Incorporating a bucket company within a family trust distribution strategy offers an effective solution for managing income and reducing the family’s tax burden. By directing income to a corporate entity, the family trust benefits from flexibility in income distribution, deferred taxation opportunities, and overall tax savings.

Aspira’s team of accountants and business advisors can help you design and implement a bucket company structure that aligns with your family’s financial goals, ensuring that your trust structure supports long-term tax efficiency and compliance.

For additional insights, consider exploring how the ProfitGuard Strategy may complement your wealth management and risk mitigation objectives.

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