A bucket company is one of the most effective tax management tools available to business owners with consistently strong profit. It is a private company that sits alongside your family trust and receives distributions of trust income at the company tax rate of 25% – rather than that income flowing through to individuals at personal rates of up to 47%.
Why Businesses Use This Strategy
The maths is straightforward. When your trust distributes to a beneficiary who is already earning well, that income gets stacked on top of their existing income and taxed at the top rate. A bucket company captures that income at 25% instead.
Consider a trust generating $250,000 in profit. Distributed equally between two individuals, total tax comes to $61,576 – an effective rate of 24.6%. But if each individual instead receives $90,000 and the remaining $70,000 is directed to a bucket company, total tax falls to $56,676 – an effective rate of 22.7%. That is $4,900 saved, every year, simply by redirecting the income that would otherwise push individuals into higher brackets.
The tax saving stays inside the company as retained earnings. Over time, that accumulation can be used to fund investment in shares or property, held in reserve, or drawn down strategically through dividends in lower-income years.
A Worked Example
Option 1: Distribute profits 50/50 to Individuals 1 and 2. Total tax payable = $61,576 | Option 2: Distribute $90,000 each to Individuals 1 and 2 and distribute the balance of $70,000 to a “bucket” company at a 25% tax rate. Total tax payable = $56,676 |
The VALUE of this strategy in Option 2 is $4,900 in TAX SAVED!
A Bucket Company can help you save tax.
Note: This strategy assumes that the $70,000 cash is available to be distributed to a bucket company. If the cash is not available, a Division 7A Loan Agreement may need to be entered into, with repayments generally made over a 7-year period. The ATO’s Division 7A benchmark interest rate for the income year ending 30 June 2026 is 8.37%.
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.
The Key Requirements to Make This Work
It is not a set-and-forget strategy. There are important conditions and ongoing obligations:
- The company needs its own bank account. Funds must actually be received by the company. If the trust distributes to the bucket company but no funds are transferred, that creates an unpaid present entitlement (UPE), which the ATO treats as a loan from the company back to the trust. This triggers Division 7A and requires a complying loan agreement to be in place by the tax return lodgement date.
- Division 7A must be managed carefully. If money flows from the company to a shareholder or related party without proper loan documentation, it can be deemed an unfranked dividend — a costly mistake.
- The shareholder of the bucket company must be a separate discretionary trust — not an individual. This is essential to allow flexibility in how retained profits are distributed to family members in the future, and to access the 25% base rate entity tax rate. If an individual is the shareholder, the distribution is treated as coming via a direct shareholding and the company tax rate increases to 30%.
- The 25% company tax rate applies only to base rate entities — those with aggregated turnover under $50M and where no more than 80% of assessable income is passive. This needs to be confirmed annually.
When It Makes Sense
The bucket company is most valuable when:
- The business is generating consistent profit above what beneficiaries can absorb at lower tax rates
- There is a long-term view on retaining and accumulating earnings rather than drawing everything out
- Family members who would otherwise receive distributions are already in higher tax brackets
- There is a plan for how retained profits will eventually be accessed (dividends, winding up, investment)
When to Ask Us
If you do not currently have a bucket company and profitability is strong, it may be worth setting one up before 30 June. If you already have one, it is worth confirming the bank account is operational, the Division 7A position is documented, and the shareholding structure still reflects your long-term goals.
Content in this article is general in nature and should not be taken as financial advice. If you are interested in this tax planning strategy, please contact our office to speak with one of our Accountants before proceeding any further.
