Recently we have been discussing family trusts and the ability to potentially split income across the family and reduce your overall tax bill.
I have since been getting a lot of enquiries asking what could be done if the trustee has split the income as much as possible within the family, but every family member is now on the top rate of tax (because of their income levels).
The answer might be having a company as another beneficiary of your trust.
A “bucket company” allows you to “cap” the tax on profits to 30% or 26%.
Example:
Harry’s Hardware has done it again and achieved record profits of $450,000.
Harry’s son Larry has now got a fulltime job earning some good money. He will not be receiving a trust distribution this year.
If the income was split 50:50 between Harry and his wife Sally, the approx. tax bill would be $152,834. That’s not ideal as they are both now in the 47% tax bracket.
A better option might be to distribute $120,000 to each of them and distribute the balance of $210,000 to a bucket company.
This example would result in a total tax bill of approx. $117,974.
That’s a TAX SAVING of about $35,000 in the current year!
Ideally the cash would need to be paid to the company otherwise you would need to enter into a loan agreement and navigate a few hurdles.
Still, the cash in the bucket company can be used to invest or lend to other entities at a specific interest rate.
The money could be taken out of the company in future years by paying you a franked dividend.
𝐇𝐞𝐫𝐞’𝐬 𝐭𝐡𝐞 𝐤𝐢𝐜𝐤𝐞𝐫:You can time that to when your income is lower (meaning your tax on the dividend will be lower and you will get a credit for the tax the company has paid).
Like any tax advice make sure you get help for your specific situation.
𝐈𝐟 𝐲𝐨𝐮 𝐚𝐫𝐞 𝐚 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐨𝐰𝐧𝐞𝐫 𝐚𝐧𝐝 𝐲𝐨𝐮 𝐚𝐫𝐞 𝐨𝐯𝐞𝐫𝐰𝐡𝐞𝐥𝐦𝐞𝐝 𝐭𝐡𝐢𝐬 𝐭𝐚𝐱 𝐭𝐢𝐦𝐞, 𝐈’𝐯𝐞 𝐠𝐨𝐭 𝐲𝐨𝐮𝐫 𝐛𝐚𝐜𝐤.
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