FAQ 74 What is the purpose of a Bucket Company and do I need one?

At the end of each financial year a trustee must distribute any profits of the trust that it controls to the beneficiaries of the trust. If it fails to do this then the trust will become liable to pay tax on these profits at the maximum tax rate.

The distributions when received by each beneficiary are taxed at the rate applicable to that beneficiary. In practice this means that if beneficiary A is paying tax at 30% then that beneficiary will pay tax at the rate of 30% on the distribution that is received. The choice of beneficiaries may be quite large in the case of a family trust as many may well be unnamed. Each beneficiary will have differing rates of tax and for those over the age of 18 and not working they will have a tax free threshold of $18,200. A distribution of $18,200  received by such a person would not attract any tax payment.

A bucket company is simply another potential  beneficiary which pays tax at the company rate of 30%. If the trust has beneficiaries which pay tax at a rate lower than 30% then it makes sense for the trustee to distribute to these beneficiaries. If the trust does not have beneficiaries which pay tax at a rate lower than 30% then it may be sensible for the trustee to distribute to a bucket company. The investor should consult with your accountant well before the end of the tax year to decide this and document these distributions. A bucket company can be set up at any time but needs to be in place at the time that the trustees are nominating the distributions.