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Business owners are often shocked at the amount of tax they need to pay when they first generate a good profit. You need the right strategies so you don’t have to pay more tax than what’s necessary. Business owners sometimes lower tax by maximising deductions but while it is a good way to minimise tax, you would need to sacrifice profit to reduce tax. A good way to lower tax is to structure your personal and business assets tax effectively. You can utilise a corporate beneficiary or bucket company. A bucket company is a company that’s set up as a trust beneficiary. It is called a bucket company because the company is below the trust, used to pour money to lower tax. It allows you to cap your payable tax at a corporate tax rate, which is 27.5% using a bucket company or 49% individual top marginal rate without one. The average rate of tax is the overall percentage you’ve paid in tax.

Setting up a bucket company is straightforward. To access the capped tax rate, you need to modify your trust structure (often into discretionary trusts so it comes with a bucket company where you can distribute profits to. You need to understand your responsibilities to remain compliant with the ATO once this is set up. If you decide to distribute to a bucket company for the financial year, a physical distribution for this amount has to be made to your company bank account before lodgement of tax return.

If there are not enough funds, you are allowed a 7-year repayable loan between the bucket company and trust with interest at benchmark rates. This is a Div 7A loan. Div 7A loan is a loan between the company receiving the profits and the trust distributing them. If the trust does not pay all distributions in cash before lodgement of tax return Div 7A loan will be created. It has a maximum term of seven years, a minimum annual repayment plan and interest that’s payable at commercial rate recommended by the government.

The trust needs to meet the minimum repayments by physically making payment to the bucket company every year. The bucket company can also declare dividends that can be offset against the minimum repayment.

A dividend will be paid to shareholders to get money out of the company. The shareholder will receive a franking credit on paid tax as the dividend has been taxed at company tax rate. A franking credit can pass on paid tax at company level to shareholders.

Consider who your company shareholders will be. For individuals, dividend distribution doesn’t allow much flexibility. Dividends must be distributed exactly based on shareholder percentage. You can set up a separate trust to hold company shares so dividends can be distributed by the trust tax effectively. It is beneficial to hold shares in a trust in terms of asset protection. Eventually, the company will have great value if a large profit is distributed to it. If an individual holds the shares, the individual can be exposed in case of legal proceedings. A separate trust will act as another layer of asset protection while providing flexibility on how distributed dividends are taxed effectively.

A bucket company is a good structure to hold long-term investments. It can be an investment company that generates another income for the owner. Cash can be invested on listed shares, private investments or investment properties as it gets transferred from trust to the company. Consider how companies are taxed. They do not get the 50 per cent CGT discount that trusts and individuals can access if the asset is held for over 12 months. Profit within a company is also taxed at the corporate tax rate. If you distribute to a company to save tax, you will likely be taxed under your personal tax rate. You would need a good accountant to advise you on a tax strategy that’s best for your situation.

As you look for different ways to grow and improve your business, seeking professional advice could prove to be an important and helpful decision.

You can click here to speak to a businessaccounting and bookkeeping firm. We also offer hospitality business consultation and mortgage services. We will give you a call to know more about your needs. We will explain to you how we can improve your business.

We would love to help you formulate investment strategies and streamline your processes to take your business to the next level.  Our goal is to help you grow your business, find ways to invest more and increase your productivity.

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