Here’s how this works:
Assume a trust earns $250,000 in profits from business
Option 1:
Distribute profits 50 / 50 to Individuals 1 and 2.
Total tax (inc. Medicare Levy) payable = $66,734 (26.7%)
Option 2:
Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company at a 25% tax rate. Total tax payable = $60,534 (24%).
(Note: This strategy assumes that the $70,000 in cash is available to be distributed to a bucket company, otherwise what is known as a Div 7A Loan Agreement will need to be entered into and loan repayments made over a 7-year period.)
The value of this strategy is $7,100 in TAX SAVED!
The cash in a “bucket company” can be used to invest in shares, property, or to lend to other entities at a specific interest rate.