How business owners and self-employed individuals are legally paying less tax using a ‘bucket company’

Paying high amounts of personal tax is one of the most frustrating things about being a successful business owner. After all, you’ve worked hard to get to where you are now—and you’re generating valuable economic activity and probably employing other people, too—so it can be frustrating seeing almost half of your sweet reward taken away as tax. 

As you already know, there are straightforward and commonly implemented strategies to reduce tax. For example, you can claim deductions within your business and your personal tax environment, and you can utilise a negative gearing strategy (this is most commonly done via an investment property portfolio). However, these strategies will only stretch so far. 

A powerful tax-saving strategy we recommend to many of our high-earning self-employed clients is called a ‘corporate beneficiary’, also known as a ‘bucket company’.

Please note, before you continue reading, I must stress that this article is general information only. It is not tax advice, nor is it financial advice. If you are looking for advice specific to your unique situation, please contact us here or request a Wealth Potential Strategy Meeting.

What is a ‘bucket’ company, and how does it work?

In simple terms, a bucket company is a separate legal entity that pays some of your business’ tax for you, at a lower rate. In other words, instead of ALL of your business’ tax being paid via a trust through your personal income (and other ‘human’ beneficiaries), some of it is distributed through a corporate beneficiary that pays a lower tax rate. This strategy assumes you are using a trust structure to pay tax.

Instead of paying up to ~47% tax, a bucket company will, at the time of writing this article, only pay up to 30% corporate tax*.

*please note, this information may not apply to you. Please speak with us for specific advice relevant to your unique situation.  

Example of tax savings from a bucket company

Let’s look at a high-level example of how a bucket company works. Please note, these are generalised calculations only.

Let’s say your business earns $1M in profit this year, and you are the only beneficiary of the trust it is attached to. Your marginal tax rate will be 47%, and you will pay approximately $450,000 in income tax. This means your income (excluding Medicare levy and other levies) will be roughly $550,000. 

Instead, let’s say you use a bucket company, where:

• You allocate $45,000 of the business’ profit to your own personal income. You will pay $0 tax on the first $18,200, and $5092 tax on the remaining amount up to $45,000 (19c for every dollar between $18,201 – $45,000).
• You allocate $955,000 to the bucket company. The company will pay 30% corporate tax on this amount, which is approximately $285,000. You then receive the ‘franked’ distributions as a shareholder.
• The total amount of tax paid on the $1M will be $290,000. This means your income will be roughly $710,000 (excluding Medicare levy and other levies). 

Please note, this is a deliberately oversimplified example. This information may not apply to you. Please speak with us for specific advice relevant to your unique situation.  

To summarise:

• Without using a bucket company, your after-tax income will be roughly $550,000*
• With a bucket company, your after-tax income will be about $710,000*
• With a bucket company, you will earn approximately $160,000 more after-tax income*

 *excluding levies and other obligations unique to your situation

Please note, this is a deliberately oversimplified example. This information may not apply to you. Please speak with us for specific advice relevant to your unique situation.  

How to set up a bucket company

Of course, starting and operating a bucket company is a complicated process. It comes with specific ongoing taxation and record keeping obligations. Unless you are a taxation professional, you will need help establishing and managing these entities.

If you think a bucket company may help you pay less tax, please contact us to chat more about your current situation. Together, we’ll determine if a bucket company is a suitable strategy for you. 

Get started with a free Wealth Potential Strategy Meeting

Over the past 20 years, the team at McGregor Wealth Management has helped hundreds of hard-working business owners pay less tax, create an exciting financial plan, accelerate their wealth creation and build an Awesome Independent Retirement.

Unlike most financial advisors who focus on market-based investment strategies (often driven by alliances with big financial institutions), we take a more holistic and client-focused approach to help you accelerate your wealth, so you can maintain (and ideally improve) your income and lifestyle in retirement.

Our process is simple and begins with a Free Wealth Potential Strategy Meeting, during which…

• You’ll get a clearer picture of where you are right now in your financial journey, and what you can do in the next few years to save tax and maximise your returns (Note: Many people are shocked to discover how much positive difference our strategies can make to your wealth position in retirement)
• You’ll gain clarity over what you want your retirement to look like, and a realistic plan to get there without spoiling your current lifestyle
• You’ll learn about legitimate ways to redirect tax dollars, so you not only keep more of what you earn, you leverage it into passive income for retirement
• And you’ll explore strategies to quickly boost your super and savings, so you can maximise your investments, accelerate your wealth, and retire sooner and richer
• Although many participants realise there is a ‘gap’ between where they are currently, and where they’d like to be, they are relieved to discover there is a realistic way to close the ‘gap’ and achieve a more exciting ‘wealth potential’.

By simply going through this exercise, many people feel more in control of, and optimistic about, their financial future.

To explore how we can help you understand your wealth potential, get in touch to arrange a Free Wealth Potential Strategy Meeting.

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