Retirement, Tax

Bucket companies a valid strategy tool

bucket companies retirement tax

Bucket companies are a legitimate retirement and tax planning tool and claims they are out of favour with the ATO are untrue.

SMSF accountants should not dismiss the use of bucket companies to help trustees manage pre-retirement income as they are a legitimate strategy tool that will not attract ATO attention if used correctly, according to an tax accountant and wealth adviser.

Change Accountants and Advisors chief executive Tim Munro said many accountants do not use bucket companies and “avoid them like the plague”.

“What we have seen is that sometimes some accountants get too deeply involved in thinking about the usage of bucket companies and that the ATO is against any legitimate tax planning strategy,” Munro said in his online presentation for the LightYear Docs 2021 Virtual Strategy Summit today.

“If they are looking at a bucket company, at the end of the day they are 100 per cent legitimate.”

LightYear Docs chief executive Grant Abbott added this topic was frequently discussed, but the ATO’s website and comments from SMSF segment assistant commissioner Steven Keating indicated bucket companies were able to be used and the regulator only moved against extreme cases of inappropriate use.

Munro said bucket companies played a key role in retirement income planning and could be used to help build wealth prior to retirement age in conjunction with tax planning.

“If you have two clients earning high incomes, instead of paying tax at 47 per cent, if it is legitimate, they can move profits into a company and pay half of that tax rate and use the cash to invest,” he said.

“They will not get a capital gains tax discount, but won’t have to deal with a Division 7A loan, and when this is explained a lot of clients are happy to pay a bit more tax but have their money protected, and when they are 65 and retired, they have a massive amount of retained earnings.”

He pointed out these earnings can be used to pay a tax-free franked dividend to the client and when those funds have run out, they could switch to retirement savings within their SMSF to continue to fund their retirement.

This strategy also benefited from planning for future tax payments and accountants could offer value to clients by offering a tax planning report at the start of the financial year, he noted.

“In the early part of the year list the company, trusts, super funds, members and work out what they expect to make this year and what the tax will be and plan for it,” he said.

“Charge the client something so they appreciate it, and now your client also knows the plan and you can update it each quarter.

“You can also start talking superannuation now. If you know you are going to put funds in super, put it in now and get the funds to work instead of waiting till June next year.”

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