Running a successful business or family investment vehicle in Australia usually brings an unwelcome companion: a rising tax bill. Once your taxable income climbs into the top marginal bracket you can lose forty-seven cents in every extra dollar you earn to tax and Medicare levy. A bucket company, sometimes called a corporate beneficiary, offers a legitimate way to cap that rate at the company tax ceiling of twenty-five per cent and to delay personal tax until you choose to draw the funds. Used correctly, this single structural change can put five, ten or even fifteen thousand dollars back in your pocket every year. Used incorrectly, it can trigger the Australian Taxation Office’s anti-avoidance provisions and leave you worse off. This guide walks you through the mechanics, the numbers, the legal requirements, and the real-world outcomes so that you can decide whether a bucket company deserves a place in your 2025 tax strategy.
What a Bucket Company Actually Is
A bucket company is an ordinary proprietary limited company that sits alongside the beneficiaries listed in a discretionary (family) trust deed. At the end of each financial year the trustee may distribute some or all trust profit to that company instead of to the high-income individual family members. The income “drops” into the company like water into a bucket, hence the nickname. The company pays tax on that distribution at the prevailing base-rate-entity company tax rate, which is twenty-five per cent for the 2024-25 and 2025-26 income years provided its aggregated turnover is under fifty million dollars and no more than eighty per cent of its income is passive. If the company does not meet those thresholds the tax rate is thirty per cent, which is still materially lower than the top personal rate.
Because the trust deed gives the trustee absolute discretion each year, the trustee can direct income away from the bucket company in future years if that becomes advantageous. The company itself can retain after-tax profits indefinitely, reinvest them, or pay franked dividends to shareholders later, passing on a credit for the tax already paid.
The Mathematics of Bucket Company Tax Savings
Many business owners and investors grasp the conceptual benefit but underestimate the compounding value. A quick comparison between personal and company tax rates paints the picture.
Individual resident tax rates for 2024-25:
| Taxable income | Marginal rate (incl. Medicare) |
|---|---|
| $0 – $18,200 | 0 % |
| $18,201 – $45,000 | 19 % |
| $45,001 – $135,000 | 30 % |
| $135,001 – $190,000 | 37 % |
| $190,001+ | 45 % |
Add Medicare levy 2 % once income exceeds $29,033.
Company base-rate entity tax rate: 25 %.
Imagine a discretionary trust that has $200,000 of distributable profit in 2024-25. Without a bucket company the trustee distributes the entire amount to Chris, a resident individual who already earns $190,000 from salary. The additional $200,000 pushes Chris’s taxable income to $390,000. Tax on that extra amount is $90,000 at 45 % plus $4,000 Medicare levy, a total impost of $94,000.
Now consider the same scenario with a bucket company. The trustee resolves on 30 June to distribute the $200,000 to BC Pty Ltd, the corporate beneficiary. BC Pty Ltd pays company tax of $50,000 (200,000 × 25 %) and retains $150,000 after tax. The immediate saving compared with Chris receiving the income directly is $44,000. If that happens every year, even without growth in trust profit, the five-year cash flow difference is $220,000 before compounding.
How to Set Up a Bucket Company Step by Step
Creating a bucket company structure involves both trust and company law. While professional assistance is highly recommended, understanding the process keeps you in control.
First you incorporate a proprietary limited company through the Australian Securities and Investments Commission. ASIC form 201 can be lodged online and the registration fee is currently $576. You nominate at least one director who must ordinarily reside in Australia and you issue one or more shares, usually to an existing family member or a new discretionary trust. After ASIC approves the registration the company receives an Australian Company Number and is automatically registered with the Australian Business Register for an Australian Business Number.
Second you update the discretionary trust deed if necessary so that the company is an eligible beneficiary. Many modern deeds already include any companies in which the primary beneficiaries hold shares but older deeds may require a formal deed of variation. Because deeds are dutiable documents in some states you must consider stamp duty; in New South Wales, for instance, adding a beneficiary currently triggers nominal duty of $500 under section 54 of the Duties Act 1997.
Third, before 30 June each year, the trustee must pass a valid distribution resolution allocating the desired percentage or dollar amount of the trust’s net income to the company. If you miss the deadline the ATO can treat the income as undistributed and apply section 99A of the Income Tax Assessment Act 1936, taxing the trustee at forty-seven per cent.
Fourth, after the year end you prepare financial statements and lodge two tax returns: a trust return for the discretionary trust and a company return for the bucket company. The company’s assessable income includes its share of the trust’s net income, and it claims the company tax rate automatically.
Finally, you decide how to deal with the after-tax cash sitting in the company. Leaving the funds in the business bank account is perfectly acceptable, but many families either lend the money back to the trust for investment or declare franked dividends to themselves in future years. If money leaves the company other than as a dividend, you must comply meticulously with Division 7A loan rules to avoid the deemed dividend penalty.
Compliance Requirements You Cannot Ignore
The ATO recognises bucket companies as a mainstream planning tool, but it watches three areas closely: Division 7A, section 100A and Part IVA. Division 7A recharacterises certain payments or loans by private companies to shareholders or associates as unfranked dividends unless they sit under a complying loan agreement with specified minimum interest and repayment terms. If your bucket company distributes profits back to the trust or to family members without a proper loan agreement you can end up paying extra tax at your marginal rate plus interest.
Section 100A targets “reimbursement agreements” where the person who uses the economic benefit differs from the person who is taxed. If the trust distributes income to the company but someone else accesses that cash immediately, the ATO may disregard the distribution and tax the trustee at top marginal rates. The key defence is demonstrating ordinary family or commercial dealing, which generally requires contemporaneous documentation of genuine loans and clear cash flow tracing.
Part IVA is the general anti-avoidance rule. Even if you tick every technical box, the Commissioner can cancel a tax benefit if the dominant purpose of your arrangement is to obtain a tax advantage. In practice the ATO rarely applies Part IVA to run-of-the-mill bucket company structures, but thin documentation, circular cash flows and repeated stripping of funds heighten the risk.
Advanced Strategies for 2025 and Beyond
Once a bucket company is up and running, you can layer additional strategies to amplify the benefits. A popular approach is to establish two corporate beneficiaries. The first receives the annual distribution. The second, owned by a self-managed super fund, subscribes for shares in the first so that future dividends flow into the concessionally taxed superannuation environment. Because super funds in accumulation phase pay fifteen per cent tax on income and potentially zero per cent in pension phase, you can cascade the tax savings.
Real estate investors sometimes channel retained profits in the bucket company into a deposit on commercial property. The company then owns the property directly or via a subsidiary unit trust, earning rental income that is franked when ultimately paid to shareholders. Property values and rental cash flow compound in the corporate pocket while personal tax remains deferred.
Another forward-looking tactic is to time the release of retained profits during years when personal income is low. For example, if a family member takes parental leave in 2027-28 you could declare enough franked dividends to use their lower marginal tax bracket without incurring extra tax.
When a Bucket Company May Not Be Right
Bucket companies favour households with consistently high trust income and surplus cash flow that can remain parked in the business structure for at least several years. If you rely on every cent of that income to fund lifestyle spending you will draw the money out of the company quickly, triggering Division 7A loans or dividends that nullify the benefit. The strategy also provides limited value when the trust mainly earns capital gains that qualify for the fifty per cent general discount, because companies cannot receive the discount. In that case distributing gains directly to individuals can be cheaper. Finally, high passive-income businesses that fail the base-rate-entity test pay thirty per cent company tax, eroding the margin between company and personal rates.
Common Mistakes and How to Avoid Them
The most frequent error is failing to prepare a compliant trustee distribution minute before 30 June. Accountants rescue dozens of clients each July who assumed they could finalise their distribution decisions with the tax return many months later. You must capture the resolution on or before the last day of the income year.
The second trap lies in moving money out of the company without a loan agreement. Even informal cash transfers between company and trust bank accounts can trigger an automatic deemed dividend if the balance is not rectified by the lodgement day of the company’s return. The minimum benchmark interest rate for Division 7A complying loans in the 2025-26 income year is 8.27 per cent, significantly higher than recent years, so unplanned loans can become expensive.
A third pitfall is forgetting franking credits. When the bucket company eventually pays a dividend it must have sufficient franking credits attached, or additional top-up tax arises at the shareholder level. If the company’s profits have already been distributed as loan advances and no tax has been paid, there are no credits available to frank the dividend.
2025 Regulatory Updates to Watch
Treasury’s October 2024 Budget announced a consultation on trust integrity measures that could limit the deferral advantage of corporate beneficiaries. Although no draft Bill has been released, early commentary suggests a possible requirement for bucket companies to pay a minimum dividend within five years of receiving a trust distribution. Tax professionals expect any legislation to apply prospectively from 1 July 2026. Monitor treasury.gov.au for developments and review your structure annually with your advisor.
The ATO has also updated Practical Compliance Guideline PCG 2022/2 on trust distributions. The risk matrix now places distributions to companies that subsequently lend money back to the trust in the “heightened risk” zone unless the loan is secured and on commercial terms. If you rely on that circular funding method, expect greater scrutiny.
Real Stories of the Numbers in Action
Consider the Patel family, who operate a marketing agency through a discretionary trust. In 2021-22 they distributed $300,000 to themselves personally and paid $140,000 in tax. On advice they established Sunstone Pty Ltd as a bucket company for the 2022-23 year, directing the full $300,000 to the company. Sunstone paid $75,000 in tax and lent the net $225,000 back to the trust under a seven-year Division 7A loan at the prescribed interest rate. The trust used the money to fund working capital, avoiding the need for a bank overdraft. Over the first two years the Patels saved a net $130,000 in tax and interest costs compared with their previous structure.
The Nguyen siblings inherited an investment portfolio that generated $90,000 in fully franked dividends. Those dividends flowed through their family trust into Horizon Pty Ltd, their bucket company. Because the dividends already carried franking credits, Horizon claimed a refund of franking offsets, reducing its tax liability to near zero. The company has retained the cash for a future property acquisition, illustrating that bucket companies can shelter both active business income and passive investment income.
Your Implementation Timeline from Idea to Benefit
- Day 1 to Day 5: Incorporate the company with ASIC, obtain TFN and ABN, and open a bank account.
- Day 5 to Day 20: Amend the trust deed if necessary and lodge any duty paperwork with the state revenue office.
- Day 20 to Day 25: Update accounting software, create ledger codes for company beneficiary distributions and Division 7A loans.
- Day 25 to 30 June: Estimate taxable income, draft trustee resolution and sign before midnight on 30 June.
- July to September: Prepare year-end accounts, calculate Division 7A loan minimum repayments and book journal entries.
- By 31 October or the concessional agent-lodgement date: Lodge trust and company tax returns, pay company tax and first Division 7A repayment.
- Following years: Review profitability and decide annually whether to continue distributing to the bucket company or to family members.
Final Thoughts: Is a Bucket Company Your Next Smart Move?
Bucket companies have become a mainstream weapon in the Australian tax planner’s armoury because they convert sky-high marginal rates into the flat, predictable company rate and give families control over when they finally recognise personal income. When the structure aligns with commercial reality, documented with care and monitored each year, it reliably saves thousands of dollars. When set-and-forget complacency creeps in, it can unravel just as quickly. If your trust already produces profits in excess of your family’s living-expense needs, the numbers suggest at least a ten-thousand-dollar annual upside from exploring the corporate beneficiary option. Engage a Chartered Accountant or CPA, draw up a plan, and make 2025 the year you keep more of what you earn.
