A bucket company is a company that receives distributions from a family trust, capping the tax on that income at the corporate rate of 25% or 30% instead of personal rates up to 47%. Pairing a family trust with a bucket company is a common strategy to retain and reinvest surplus profits tax-effectively. For the full mechanics, including what decides the 25% or 30% rate and the top-up tax on extraction, see our complete guide to bucket companies in Australia.

If you operate a profitable business through a family trust, you are probably already benefiting from income splitting. But there’s a second layer to the strategy that most accountants don’t explain until you’re already paying $50,000+ in tax each year — the bucket company. Understanding how a family trust and bucket company work together is arguably the most powerful tax-minimisation structure available to Australian business owners, and yet it’s used by a surprisingly small percentage of people who could benefit from it.

This guide explains what a bucket company is, how it works alongside a family trust, the numbers behind the tax savings, and the key rules you need to follow to stay on the right side of the ATO. If you haven’t yet set up your family trust, start with our guide to how to set up a family trust in Australia. If you want to understand trust distributions before adding the bucket company layer, read our guide to family trust distributions and ATO compliance first. For a broader overview of all Australian business structures and how to choose the right one, see our complete guide to business structures in Australia.

What Is a Bucket Company?

A “bucket company” is simply a private company that acts as a beneficiary of your family trust. It has no employees, no trading activity, and no assets in its own right. Its entire purpose is to receive trust distributions at the corporate tax rate — and hold that income in a lower-tax “bucket” until you decide what to do with it.

The name “bucket” is informal — you won’t find it in any ATO legislation — but it perfectly describes the function: excess income flows from the trust into the company the way water flows into a bucket. The company traps it at a lower tax rate, and you access it later in a tax-efficient way.

The key advantage is tax rate arbitrage. Australia’s corporate tax rate for base rate entities (companies with aggregated turnover below $50 million) is 25%, but only where the company passes the base rate entity test, which turns on how much of its income is passive. If you or your spouse earn over $180,000, your marginal tax rate is 45% (plus the 2% Medicare Levy = 47%). Every dollar of trust income you redirect from your personal tax return to the bucket company saves approximately 22 cents in the dollar — immediately.

How the Trust + Bucket Company Combination Works

Here’s how the structure operates in practice:

Step 1: Your business operates under the family trust (or the family trust holds shares in your trading company). The trust generates net income each financial year.

Step 2: Before 30 June, the trustee makes a resolution distributing income among beneficiaries. Lower-income family members receive income up to the tax-free threshold or lower marginal rate bracket. The remaining income — which would otherwise be taxed at the high-income earner’s marginal rate — is distributed to the bucket company.

Step 3: The bucket company receives its distribution and pays tax at 25% (base rate entity) or 30% (large company). The after-tax amount sits inside the company as retained earnings.

Step 4: Over time, you access the money from the company via dividends, a Director’s salary, or other compliant mechanisms — all discussed below.

The Numbers: A Real-World Tax Saving Example

Let’s say your family trust earns $400,000 in net profit this financial year. You and your spouse are both on high incomes. Here’s what happens without a bucket company versus with one:

Without a bucket company:

• Distribute $200,000 to you and $200,000 to your spouse
• Both of you are in the 45% tax bracket on the top slice
• Approximate combined tax on $400,000: ~$146,000

With a bucket company:

• Distribute $120,000 to you (keeping you at the 37% bracket on top income)
• Distribute $90,000 to your spouse (at 32.5% on the top slice)
• Distribute the remaining $190,000 to the bucket company at 25%
• Approximate combined tax: ~$88,500
• Annual tax saving: approximately $57,500

This is a simplified illustration — actual savings depend on your specific income profile, the trust’s tax position, and how distributions are structured. But the magnitude is real: for a business generating $400,000–$800,000 in annual trust income, the bucket company strategy routinely saves $40,000–$100,000+ per year.

How to Access Money From the Bucket Company

This is the question most people ask first — and rightly so. The tax saving is only useful if you can eventually access the money in a tax-efficient way. There are three main methods:

1. Franked Dividends

When the company has paid tax on its retained earnings, it can pay you a franked dividend. Because the company already paid 25% tax on that income, you receive a franking credit that offsets your personal tax liability. Where a trust holds the company shares, a family trust election is usually what lets those credits reach beneficiaries. If your marginal rate is 25% or below, you may even receive a refund of excess franking credits.

Example: The bucket company has $100,000 in after-tax retained earnings (on which it already paid $33,333 in tax at 25% rate). It pays a $100,000 dividend with $33,333 in franking credits. A shareholder on a 32.5% marginal rate would owe $43,333 in tax on $133,333 of gross income, offset by $33,333 of credits — combined net additional tax of $10,000. This is significantly better than having received the $133,333 directly and paying $43,333 in tax.

2. Director’s Salary

If you or your spouse are directors of the bucket company, you can pay yourselves a salary from the company. The salary is a deductible expense for the company and is included in your personal income. This makes sense when your marginal rate is lower than the corporate rate — for example, in a year when you have little other income.

3. Division 7A Loans — Tread Carefully

If the company lends money back to you (or an associated entity) without following strict rules, the ATO treats it as an unfranked dividend under Division 7A of the Income Tax Assessment Act 1936. This is one of the most common and costly mistakes made with bucket companies. Division 7A applies to loans, payments, and debt forgiveness by private companies to shareholders or associates.

To avoid a Division 7A deemed dividend, any loan from the bucket company must be documented as a compliant loan agreement, charged the ATO’s benchmark interest rate, and repaid over the maximum term (7 years for unsecured loans, 25 years for secured). We have a detailed guide on Division 7A loans that covers the rules in full. Getting this wrong is expensive — the entire loan amount can be treated as assessable income in the year the error occurs.

Note that money actually taken out of the company is a different question from an entitlement the company has never been paid. Following Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, an unpaid present entitlement that the bucket company simply leaves sitting in the trust is not a section 109D loan. A genuine advance of cash out of the company to a shareholder or associate still is one, and Bendel changes nothing about that.

Asset Protection Benefits

Beyond tax, the bucket company offers meaningful asset protection. Money held inside a company is generally protected from claims against you personally. If you face business litigation, a creditor pursuing you personally generally cannot reach assets held in a company (unless there is a personal guarantee involved or the court pierces the corporate veil).

Over time, as the bucket company accumulates retained earnings, it can invest in shares, property, or other assets — building a pool of capital that is separate from your personal estate and more difficult for creditors to reach. This long-term wealth accumulation function is as valuable as the annual tax saving for many business owners.

When the Trust + Bucket Company Strategy Makes Sense

This structure isn’t for everyone. It adds compliance cost (the company needs its own tax return, ASIC fees, and annual accounting) and the money inside the company is not as easily accessible as personal savings. The strategy is best suited for:

• Business owners generating $200,000+ per year in trust net income
• High-income earners (above $120,000 in personal taxable income)
• Business owners who don’t need immediate access to all their profits
• People focused on long-term wealth building and asset protection
• Situations where the tax saving clearly exceeds the annual compliance cost

For smaller businesses still growing, the structure may not justify itself until profitability reaches a meaningful threshold. A qualified tax adviser — such as a Chartered Tax Adviser (CTA) — can model your exact numbers and confirm whether it makes sense for your situation.

How to Structure It Correctly From the Start

The most important decisions happen at setup time:

• Trust deed must name the company as an eligible beneficiary. If the bucket company is set up after the trust, ensure the trust deed allows it to receive distributions. Many older deeds are narrow in their beneficiary definitions — a deed variation may be needed.
• The company must be a base rate entity to attract the 25% rate. Ensure it doesn’t hold passive investments in a way that would reclassify it as a non-base rate entity (30% rate).
• Shareholder structure matters. Who owns the shares in the bucket company determines who can receive dividends. Typically the shares are held by individuals or by a family trust itself (adding another layer of flexibility).
• Directors should be carefully chosen. Directors have personal liability exposure — this is a consideration if the company borrows or provides guarantees.
• Separate bank accounts and bookkeeping for the company are mandatory. Commingling funds with the trust or personal accounts creates a Division 7A risk from day one.

For guidance on setting up the trust itself, see our full family trust setup guide and our tax planning services. If you’re comparing all available structures, our business structuring service walks through every option for Australian business owners.

Risks and Limitations to Understand

No strategy is without complexity. The main risks and limitations to be aware of:

• Locked funds. Money inside the company can’t be withdrawn informally. Every extraction must follow the rules (dividends, salary, compliant loans). This requires discipline and planning.
• Annual compliance cost. The company needs its own ASIC registration (~$310/year), tax return, and accounting. Budget $1,500–$3,000/year for company compliance costs.
• Division 7A traps. If the company lends money back to you without a compliant loan agreement, the ATO treats the loan as a dividend. This is easy to accidentally trigger and hard to unwind.
• Subdivision EA. Where the trust still owes the bucket company an unpaid entitlement, a payment or loan from the trust to a shareholder of that company, or to their associate, can trigger a deemed dividend under Subdivision EA. This is now the main Division 7A exposure in a trust and bucket company structure.
• ATO Scrutiny. The ATO monitors trust distributions to related companies closely, particularly under the Section 100A rules. Ensure distributions are genuine and the company actually holds and uses the distributed funds.
• Franking credits have a shelf life. Franking credits generated in the company can only be used when dividends are paid. If the structure is wound up or changes substantially, unused credits may be lost.

Frequently Asked Questions

Do I need a separate bucket company or can I use my existing trading company?

You should always use a separate company as your bucket company. Your trading company carries business liabilities — using it as the distribution beneficiary exposes your accumulated profits to the risks of the business (creditors, litigation). A dedicated bucket company ring-fences the wealth from the trading risks. This is a non-negotiable aspect of the structure.

What’s the best way to access money from a bucket company?

The most tax-efficient method depends on your personal income level. In most cases, franked dividends are the cleanest approach — particularly when you or family members have capacity in lower tax brackets. For high-income years, it may be better to leave money in the company and pay a small Director’s salary in future years when income is lower. Discuss this with your accountant each year as part of your annual distribution planning.

Can I use my bucket company to invest in property or shares?

Yes — and this is one of the most powerful long-term uses of the structure. A bucket company can invest in Australian shares and receive fully franked dividends from those investments (which come with franking credits). It can also purchase investment property, although the 50% CGT discount is not available to companies. Over a 10–20 year horizon, a bucket company that invests its retained earnings can accumulate substantial wealth outside the reach of personal creditors.

Does the ATO have specific rules targeting this strategy?

The ATO accepts the trust-to-company distribution strategy where it is commercially genuine. The key compliance areas are: Section 100A (where distributions lack genuine economic substance), Subdivision EA (where trust funds find their way to a shareholder of the bucket company or their associate while an entitlement is unpaid), Division 7A (loans from the company back to associates), and the base rate entity test (which determines whether 25% or 30% applies). A well-structured arrangement, properly documented and administered, is entirely within the law.

How does this relate to the existing bucket company post on Pinnacle’s site?

Our related article on how a bucket company can save your business thousands in tax covers the mechanics of bucket companies in more detail. This article focuses specifically on how the family trust and bucket company work together as a combined structure, including the specific distribution decisions and the order of operations each financial year.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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