Bucket companies a thing of the past

The use of ‘bucket companies’ is likely to become a thing of the past as superannuation becomes the leading vehicle for tax management of investments, ACIS SMSF services director Peter Johnson has claimed.

Referring to changes proposed in the recent federal budget to introduce a minimum 30 per cent impost on the taxable income of discretionary trusts at the trustee level, Johnson said it will alter the tax landscape enough to make trusts less viable for taxation purposes.

“Superannuation, with its 30 per cent tax rate, is probably a better environment now than outside,” he stated during a recent briefing.

“I used to say if you have got a discretionary trust, distributing to a bucket company is really good because you pay 25 per cent in the bucket company, accumulate at 25 per cent, retire and then start distributing franked dividends at 30 per cent. That is now gone.

“The term ‘bucket company’ – we may as well take it out of our vernacular because it’s gone unless something drastic changes between now and the end of the year when we get the final legislation.

“Now what are you going to have to do is get as much in super because that is taxed at 30 per cent and when you take it out there is no more tax unless you are dead and leaving it to your kids, then there is more tax.

“You will need to model this and I did one the other day for a couple. They had $15 million in super and are very well off.

“I told them to leave it there as they are both 70 years old, but the minute one of you dies we consider getting it out.

“Otherwise the kids are paying 17 per cent tax on more than half of it and they had $4 million of tax-free components and $11 million of taxable components, which is $1.87 million in tax.”