What is a bucket company and when does it save tax?

Every June, somewhere in Australia, an accountant draws the same diagram: a family trust up top, arrows to mum and dad, and then a box to the side labelled “Pty Ltd” catching what’s left. That box is the bucket company — one of the most used, and most misused, tools in family tax planning.

The problem it solves

A family trust lets the trustee distribute income to family members at their marginal rates. That works beautifully until the humans run out of low tax brackets. Once mum and dad are both in the 37–45% range and the adult kids are earning properly, every extra dollar the trust distributes is taxed like a top salary — and the flexibility that justified the trust stops saving anything.

A bucket company adds one more beneficiary that never runs out of bracket: a private company, taxed at the corporate rate on whatever it receives. The trustee distributes to family members up to the point where their rates get ugly, and the remainder — the overflow — goes into the bucket.

What the saving actually is

Distribute $100,000 of trust income to an individual already in the 45% bracket and roughly $47,000 goes to the ATO including the Medicare levy. Distribute it to a bucket company and the tax is about $30,000. That’s $17,000 kept — per $100,000, per year.

But be clear-eyed about what kind of saving it is: deferral with options, not exemption. The company’s after-tax profits belong to the company. To get them into family hands you eventually pay franked dividends, and shareholders on high rates pay top-up tax at that point. The strategies that make the bucket genuinely valuable are about when and to whom those dividends flow: in a retirement year when personal income is low, to a shareholder trust that can spread them, or not at all for years while the company invests its 30%-taxed dollars.

Division 7A — the string attached

Here’s where bucket companies go wrong in the wild. When the trustee resolves to distribute to the company but the cash stays in the trust (as it almost always does — the trust needs its working capital), the company has an unpaid present entitlement (UPE): money it’s owed but hasn’t received.

Division 7A of the tax law exists to stop private company profits being enjoyed tax-free by shareholders and their associates, and the ATO scrutinises UPEs and any cash flowing back to the family. The treatment of UPEs has been contested in the courts in recent years, and administrative practice has shifted more than once — which is a reason for care, not a loophole. The safe course hasn’t changed: either the trust actually pays the entitlement across, or a complying Division 7A loan agreement is put in place — written terms, benchmark interest, minimum annual repayments — and actually honoured each year.

Run properly, this is routine. Run casually — entitlements never paid, repayments missed, agreements drafted three years late — Div 7A can deem the whole amount an unfranked dividend and hand the family the exact tax bill the bucket was meant to avoid, plus interest and penalties.

When a bucket company is worth it

The honest thresholds we use with clients: the trust reliably produces more income than the family can absorb below the top brackets; the surplus is likely to be invested rather than needed for private spending (spending it personally brings the dividend day forward and shrinks the benefit); and the family is willing to run the paperwork — resolutions, loan agreements, repayments, franking — every year without fail. As a rough guide, we want to see at least $20,000–$30,000 a year of overflow income before adding a company clears its own running costs comfortably.

Who holds the bucket’s shares matters as much as the bucket itself: shares held by the family trust keep future dividends flexible; shares held personally lock them to one taxpayer. That’s a five-minute decision at set-up and an expensive restructure later.

Setting one up

Mechanically, it’s a standard company — $1,090 ex GST plus ASIC’s registration fee — with a constitution and shareholding designed for the job, then a check that your trust deed’s beneficiary class actually includes it. The design conversation is the structuring review; the annual discipline — distribution minutes, Div 7A agreements, repayments and franking — is exactly the sort of thing our company and trust tax service exists to keep boring.

Questions we get about this

What tax rate does a bucket company pay?

Usually the 30% corporate rate. The reduced 25% rate belongs to base rate entities with mostly active business income — a bucket company living on trust distributions and passive income typically doesn't qualify. Even 30% beats a 45% marginal rate.

Is the saving permanent?

It's mostly deferral. The company's profits eventually come out as franked dividends and top-up tax may apply at shareholders' marginal rates. The wins come from timing — paying dividends in low-income years, funding investments at 30% dollars, and smoothing family income.

Can the bucket company lend the money back to us?

Only under a Division 7A complying loan agreement with minimum annual repayments and interest at the benchmark rate. Informal borrowing is exactly what Div 7A exists to tax. This is the part that must be run properly every single year.

What does a bucket company cost to set up and run?

A standard Pty Ltd registration ($1,090 ex GST plus the $636 ASIC fee) with shares usually held by the family trust, then annual accounts, a company return and ASIC's annual review fee each year. It needs roughly $20k+ of annual trust income above the family's low-rate capacity before the running costs stop mattering.

Where to from here: Structuring & succession · Tax & accounting — or start online and ask us directly.

General information only — it doesn’t consider your circumstances and isn’t financial product advice. Get advice on your own position before acting; that’s literally what we’re for.