A bucket company is a company that receives distributions from a family trust, capping the tax on that income at the corporate rate (25% or 30%) instead of personal rates up to 45% plus the Medicare levy. It is a common strategy to retain and reinvest surplus profits tax-effectively. This article focuses on the dollar saving; for the full picture, including the base rate entity tests, the unpaid present entitlement decision and the top-up tax, read our complete guide to bucket companies in Australia. For owners weighing where to direct surplus profit since the new Division 296 super tax became law, a bucket company is an increasingly attractive alternative to adding to super.

If you run a business through a family trust, you already know the flexibility it offers — income can be distributed each year to family members in lower tax brackets, reducing the overall tax bill. But what happens when you have run out of low-bracket family members to distribute to? That is where a bucket company comes in.

A bucket company is one of the most effective (and underused) tax planning tools available to Australian business owners operating through a discretionary trust. When structured and managed correctly, it can reduce the tax rate on business profits from up to 47% down to 25% — a saving of $22,000 for every $100,000 of income redirected.

This guide explains what a bucket company is, how it works, the real numbers, and the risks you must not ignore.

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What Is a Bucket Company?

A bucket company is simply a private company that has been set up as a beneficiary of a family (discretionary) trust. The name comes from the idea that surplus trust income is “tipped” into the company like water into a bucket — rather than being distributed to individual beneficiaries who would pay tax at their personal marginal rate.

The term “bucket company” is informal — it is not a legal term. The ATO refers to the arrangement as using a corporate beneficiary of a trust. This distinction matters: the ATO has published detailed compliance guidance specifically addressing distributions to corporate beneficiaries, and understanding its position is essential to running the strategy safely and confidently.

The company itself does not trade. It does not have employees or clients. Its sole purpose is to receive trust distributions and hold those funds, paying tax at the lower corporate rate.

This strategy is not a loophole. It is a well-established and ATO-recognised planning structure, provided it is implemented and maintained correctly. You can read the ATO’s general guidance on trust distributions on the ATO website.

For background on how discretionary trusts work and how they compare to other structures, see our guide: Family Trust or Company — Which Structure Is Right? For a comprehensive look at all Australian business structures — from sole trader through to a multi-entity trust and company setup — see our complete guide to business structures in Australia.

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How Does a Bucket Company Work?

Here is the basic flow:

1. Your family trust earns business or investment income during the financial year.
2. Before 30 June, the trustee passes a resolution distributing a portion of the trust’s net income to the bucket company (which is listed as a beneficiary in the trust deed).
3. The bucket company pays tax on that distribution at the base rate entity company tax rate of 25% — this applies where the company’s aggregated annual turnover is under $50 million and no more than 80% of its income is passive. A distribution from a trading trust keeps its trading character, so the bucket company normally qualifies; where the trust’s income is mainly rent, dividends or capital gains, the rate is 30% instead. See our guide to the company tax rate in Australia.
4. The after-tax funds sit inside the company and can be invested or retained for future use.
5. When you are ready to extract those funds personally, you can pay yourself a franked dividend. The dividend comes with franking credits equal to the company tax already paid, which offset your personal tax liability on that income. When those shares are held inside a family trust, a family trust election is usually needed for the credits to flow through.

The key tax lever is the rate differential. Where an individual business owner on a high income pays up to 47% (45% top marginal rate plus 2% Medicare levy), the bucket company pays only 25%. That 22-percentage-point gap is the tax saving.

If you are in the process of establishing a family trust and want to build a bucket company into the structure from the outset, our guide on how to set up a family trust in Australia is a good starting point.

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The Tax Saving: A Worked Example

Let’s put real numbers to it. Suppose your family trust earns $300,000 in net income for the year. After distributing $100,000 to your spouse (who has no other income) and $18,200 to your adult child (using their tax-free threshold), you still have $181,800 to distribute. You are personally already in the top tax bracket.

Scenario	Distributed to You (Individual)	Distributed to Bucket Company
Trust income distributed	$181,800	$181,800
Tax rate applied	47% (top marginal + Medicare)	25% (base rate entity)
Tax payable	~$85,446	~$45,450
After-tax funds retained	~$96,354	~$136,350
Tax saving	—	~$39,996

On this example alone, the bucket company saves nearly $40,000 in tax in a single year. Over five to ten years of compounding retained earnings, the wealth accumulation difference is significant.

Note that these figures use simplified marginal rate calculations. Your actual position will depend on your full income profile. For current tax rates, see our Australian income tax rates guide for 2025–26.

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How Are Profits Eventually Extracted From the Bucket Company?

A common concern is: “The money is locked in the company — how do I access it?” The answer is through franked dividends.

When the bucket company pays you a dividend, it attaches franking credits equal to the 25% company tax already paid on those profits. You then include the gross dividend (dividend plus franking credits) in your personal tax return, but receive a dollar-for-dollar offset for the credits.

Here is how the extraction works in practice:

• The company pays a dividend of $75,000 (after paying 25% tax on $100,000 of profits)
• The dividend carries $25,000 in franking credits
• You declare $100,000 as assessable income
• Your tax at, say, 47% = $47,000, minus the $25,000 credit = $22,000 additional tax to pay
• Total tax paid across both entities = $25,000 + $22,000 = $47,000 — the same as if you had received it directly

This might sound like you end up in the same position, but the benefit is in the timing and compounding. By deferring the extraction to a year when you have lower personal income (for example, retirement), you may pay far less additional tax. Or, if you extract via dividends each year to multiple shareholders, the credits offset their liability efficiently.

You can also pay dividends to a family trust that holds the shares in the bucket company — maintaining distribution flexibility at the shareholder level as well.

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Division 7A: The Risk You Cannot Ignore

This is the section most people gloss over — and it is the one that causes the most problems.

Division 7A of the Income Tax Assessment Act 1936 is an anti-avoidance provision that treats certain payments, loans, or uses of company assets by shareholders (or their associates) as unfranked dividends — meaning you pay tax on them at your full marginal rate, with no franking credit offset.

In the context of a bucket company, the risk arises when a business owner:

• Borrows money from the bucket company and does not have a complying loan agreement in place
• Uses company funds to pay personal expenses (mortgage, school fees, holidays)
• Has the company pay for assets used personally without arm’s length reimbursement
• Fails to make the minimum annual repayments on an existing Div 7A loan
• Lets trust money reach the wrong people while an unpaid present entitlement (UPE) is outstanding. Where the trust resolves to distribute income to the bucket company but does not physically transfer the cash, a UPE arises. The entitlement itself is no longer the problem it once was, but a payment or loan from the trust to a shareholder of the bucket company, or to their associate, while that entitlement remains unpaid can still produce a deemed dividend under Subdivision EA

What changed in 2026: the Bendel decision

For many years the ATO’s position was that a UPE left unpaid amounted to the company providing “financial accommodation” to the trust, and was therefore a loan for Division 7A purposes. That position no longer stands.

In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court dismissed the Commissioner’s appeal and held that a private company which simply does nothing about its entitlement does not provide financial accommodation under section 109D(3)(b). A bare UPE is therefore not a loan, and does not by itself create a deemed dividend. The ATO accepted that outcome in its Bendel Decision Impact Statement, published 26 June 2026, and has said there that it will withdraw Taxation Determination TD 2022/11, the determination that set out the former view.

Be careful how you read that last point. As at September 2026, TD 2022/11 is still listed on the ATO Legal Database and marked as under review as a result of the decision, with no withdrawal notice issued. Treat it as on foot but overtaken in practice by the ATO view in the Decision Impact Statement, and check its current status before relying on it.

Three points matter for anyone running this structure, as at September 2026. A UPE that has already been converted into a complying section 109N loan remains a loan and must keep being serviced, because Bendel does not unwind it. Subdivision EA continues to apply to trust payments, loans and debt forgiveness in favour of a shareholder of the corporate beneficiary or their associate. And section 100A continues to apply to reimbursement agreements, taxing the trustee at the top marginal rate with no time limit.

A complying Division 7A loan must:

1. Be documented in a written loan agreement before the lodgement date of the company’s tax return for the year the loan was made
2. Charge interest at or above the ATO’s benchmark interest rate (which changes annually)
3. Be repaid over a maximum term of 7 years (or 25 years if secured by real property)
4. Have minimum annual repayments made each year

Division 7A is not something to navigate without advice. The ATO actively scrutinises these arrangements, and getting it wrong means a tax bill — plus penalties and interest — on money you have already spent. See our detailed guide on the top 5 Division 7A loan traps for a full rundown of what to watch.

You can also review the ATO’s official Division 7A guidance at ato.gov.au.

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Who Is a Bucket Company Right For?

A bucket company makes the most sense when all of the following apply:

• You already operate through a family (discretionary) trust. If you do not have a trust, you cannot distribute income to a bucket company in the first place.
• Your trust generates meaningful taxable income — typically $150,000 or more per year after other distributions.
• You have exhausted low-bracket family beneficiaries. Once your spouse, adult children, and other family members are all in higher brackets (or are no longer available), the company absorbs the remainder at 25%.
• You do not need to extract all profits immediately. The strategy works best when you can leave funds inside the company to compound over time, extract during lower-income years, or reinvest within the company.
• You are committed to maintaining proper records and complying with Division 7A requirements every year, without exception.

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Who Should NOT Use a Bucket Company?

The bucket company strategy is not right for everyone. You should probably not use one if:

• You operate as a sole trader or partnership without a trust. There is no mechanism to distribute income to a company beneficiary without a trust structure in place.
• Your income is modest or you are in a low tax bracket. If you are already paying 19% or 32.5% tax personally, the saving does not justify the compliance cost and complexity of running an additional entity.
• You need all profits personally each year. If cash flow means you will extract everything immediately via dividend, the tax timing benefit largely disappears.
• You are unwilling or unable to manage ongoing compliance carefully. Division 7A, annual company tax returns, ASIC annual fees, and trust resolution requirements all add cost and administrative burden. Cutting corners creates serious risk.
• Your trust deed does not allow corporate beneficiaries — and you are unwilling to seek a deed amendment. Older trust deeds sometimes restrict beneficiaries to natural persons.

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How to Set One Up

Setting up a bucket company is a multi-step process that should be completed well before 30 June each year. Here is what is typically involved:

1. Review your existing trust deed. Your adviser will check whether the deed already allows corporate beneficiaries. Many modern deeds do, but older deeds may require a deed of variation — a formal amendment executed by the trustee.
2. Register a new company with ASIC. The bucket company is registered through the Australian Securities and Investments Commission. You will need to decide on the shareholder structure — often shares are held by the business owner, their spouse, or another family trust to maintain flexibility.
3. Obtain an ABN and TFN for the company. The company will need to lodge its own tax return each year. If the company’s activities are likely to exceed $75,000 turnover, you will also need to register for GST.
4. Add the company as a beneficiary of the trust. This is done via deed amendment if required, or confirmed under the existing deed provisions if it already covers companies.
5. Pass a valid trustee resolution before 30 June. Each year, the trustee must pass a resolution directing income to the bucket company before the financial year ends. Missing this deadline means the distribution cannot be made for that year — there is no fixing it after the fact.
6. Maintain Division 7A compliance from day one. If you ever lend money from the bucket company to yourself or a related party, ensure complying loan agreements are in place before the company’s tax return lodgement date.

Ongoing costs typically include ASIC’s annual company review fee (currently $310 per year for a proprietary company), a separate company tax return preparation fee, and any additional trust deed administration costs.

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Capping tax with a bucket company depends on correct business structuring.

Deciding how to hold an investment property is a related structuring question. See our guide to buying an investment property in a trust for the tax, land tax and asset-protection trade-offs.

Frequently Asked Questions

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If you are operating through a family trust and want to understand whether a bucket company is the right next step for your structure, we would be glad to talk it through.

Book a Consultation

General Advice Warning: The information provided in this article is general in nature and does not constitute personal financial, taxation, or legal advice. It has been prepared without taking into account your personal objectives, financial situation, or needs. Before acting on this information, you should consider its appropriateness having regard to your own circumstances and seek professional advice from a qualified accountant or tax adviser. Liability limited by a scheme approved under Professional Standards Legislation.

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