Bucket Company 101: What You Need to Know

Spreading income from a trust among individual beneficiaries is a great way to minimise tax. But if you’re not wary, distributions can push beneficiaries into higher tax brackets, cancelling out intended tax savings. This can happen if the trust has a good year with high income or if beneficiaries already earn significant personal income.

This is where a bucket company is helpful. It’s set up specifically to collect excess or ‘overflow’ income from a trust, hence the term ‘bucket company’.

Here at PCR Accounting & Advisory, we help businesses and professionals minimise their tax liability while staying compliant with the ATO. To help, we’ve put together a guide on what you need to know about using a bucket company and if it’s right for you.

What is a Bucket Company and How Does it Work?

A bucket company is a corporate entity that acts as a beneficiary to a trust and receives distributions from it.

To set up a bucket company, you first must have a family trust. Furthermore, the trust deed must allow companies to be beneficiaries, a standard provision in most deeds.

Once it’s up and running, the bucket company receives income distributions from the trust each year as determined by the trustee. The bucket company either holds onto this money or uses it in various ways, like investing or paying dividends to shareholders.

Having a bucket company lets you enjoy the lower flat tax rate that companies are charged, which is 25% for base rate entities and 30% for all other companies.

In contrast, if you directed all the income from a trust to individual beneficiaries, they could be subject to the highest tax rate of 47% (45% plus 2% Medicare levy).

A bucket company provides an additional avenue to direct excess income out of a family trust. This can save a significant amount in tax, especially during years when the trust earns a lot of money.

Example:

Jack’s family trust owns a number of businesses and had an income of $500K during the 2024-25 financial year.

Jack and his wife, Kate, are the beneficiaries of the trust. If the trustee distributes this income equally between the two of them, they will both be taxed at the highest rate of 45% plus 2% Medicare levy.

To reduce tax, the trustee decides to pay Jack and his wife $45,000 each, keeping their marginal tax rate at 16% (assuming they have no other income). The remaining $410K is placed in a bucket company and is taxed at a flat corporate rate of 25%.

Based on rough calculations, this strategy could save $60K or more in tax per year. Over several years, the tax savings really add up.

What Can You Do With the Money in a Bucket Company?

Once the money goes into the bucket company, you have several options. This is where you need to be careful to avoid common compliance pitfalls that could put you in trouble with the ATO.

Invest it

A bucket company can function as an investment vehicle. Use the money in it to invest in stocks, private equity, property, or some other asset. Income from these investments, including interest payments and capital gain, is taxed at the corporate tax rate.

Note: Since the bucket company’s income will be classified as base entity passive income, it will not be considered a base rate entity, resulting in income being taxed at 30%, rather than 25%.

The investment option is ideal for those looking to leverage the bucket company to build wealth for their retirement or future generations.

Pay dividends

A bucket company can pay dividends to its shareholders, but note that they will contribute to their individual taxable income. If you’re a shareholder, you can time dividends for years when you have a low income or once you’ve retired.

Division 7A loans

You can lend the money to related entities, such as your business or family members, through a bucket company, but it must be in compliance with Division 7A.  Put simply, there must be proper loan agreements in place, clear repayment terms, and a commercial interest rate must be charged (meaning you cannot loan money at lower than market rates).

How to Set Up a Bucket Company

Start by confirming that the trust deed allows company beneficiaries, then go through with the usual set-up process for a company, including registration, opening a dedicated bank account, and choosing shareholders.

A bucket company must fulfil its obligations, like any other company. That means lodging returns on time, maintaining proper records, and ensuring ongoing compliance. All this can get complicated, and it’s easy to make mistakes that can lead to fines and penalties.

At PCR, we can take care of everything, including ensuring the trust deed is fit for the purpose, setting up the bucket company, maintaining compliance, and other administrative duties. We also offer ongoing advice tailored to your financial situation and goals.

Let’s chat about how your family trust can benefit from setting up a bucket company. Enquire online today!

Disclaimer: This blog post is for informational purposes only and should not be considered as financial or legal advice. Consult with a qualified professional for personalised guidance based on your specific circumstances.