A bucket company is a private company named as a beneficiary of a discretionary trust, used to cap tax on surplus trust income at the company rate of 25% or 30% rather than an individual’s top marginal rate of 47%. In 2026-27 it defers and smooths tax, it does not permanently avoid it.

If you are searching for this term, you almost certainly already have the problem it solves: a family trust earning more than you can sensibly distribute to people sitting below the top bracket. The real question is whether yours is built so the saving is durable, and whether you understand what you are actually buying.

I am Mina Baselyous, a Certified Practising Accountant, Chartered Tax Advisor and Registered Tax Agent, and I build these structures for Melbourne business owners most weeks of the year. What follows is the whole picture, including the top-up tax nobody mentions in the pitch and the cases where the honest answer is no.

What a Bucket Company Actually Is

A bucket company is an ordinary private company named as a beneficiary of a discretionary trust so the trustee can distribute surplus income to it. Nothing in the tax law uses the phrase. The ATO calls it a corporate beneficiary. The company does not trade, does not employ anyone, and exists to hold profit at the company rate.

The name comes from the picture: income the family cannot absorb at low rates gets tipped into a bucket instead of landing on someone already paying 47 cents. Two things must be true before it works at all. The deed has to permit a company to be a beneficiary, which older deeds sometimes do not, and the trustee has to resolve to make the distribution before 30 June. Neither can be fixed once the year has closed.

Be clear about what it is not. It is not a cheaper way to get money into your hands. It is a place to park profit you do not need this year while you choose when and to whom it eventually flows. For where it sits in a wider structure, see our guide to the types of trusts used in Australia and our overview of holding companies for tax and asset protection.

The Arithmetic: Why Owners Use One

The saving is the gap between the company rate and the individual top rate in the year the income is earned. For 2026-27 that gap is 22 points: a base rate entity pays 25%, while every dollar an individual earns above $190,000 is taxed at 45% plus the 2% Medicare levy. On $170,000 of surplus trust income, that is $79,900 of tax against $42,500.

Take a pattern we see constantly. An engineering business in Melbourne’s south east runs through a discretionary trust. For 2026-27 the trust’s net income is $610,000. The trustee distributes $190,000 to each of the two working owners, filling them to the top of the 37% band, and $60,000 across two adult children. That leaves $170,000 with nowhere sensible to go.

That $37,400 is where most articles stop, and it is the number most often misunderstood, because much of it is timing rather than a permanent win. Our post on how a bucket company saves tax works the headline saving through in more detail, and family trust versus bucket company compares the two entities side by side.

25% or 30%: What Decides Your Bucket Company Tax Rate

A bucket company pays 25% if it is a base rate entity and 30% if it is not. Section 23AA of the Income Tax Rates Act 1986 sets two tests, and the company must pass both in the year concerned: no more than 80% of its assessable income is base rate entity passive income, and its aggregated turnover for that year is under $50 million.

The character of the trust income traces through

This decides most cases, and it is where a lot of published advice is loose. The company itself does nothing, so on its own it has neither trading income nor passive income. What it has is a trust distribution. Paragraph 23AB(1)(g) of the same Act says an amount included in a beneficiary’s assessable income is base rate entity passive income to the extent it is referable, directly or indirectly, to something already passive in the trust’s hands.

The tracing only runs one way. Rent, interest, dividends, franking credits, royalties and net capital gains keep their passive character passing through the trust. Trading profit is not on the list, so it arrives as ordinary assessable income that is not passive. The practical result: a distribution from a trading trust normally leaves the company at 25%, while a company whose only income is a distribution from a rental or investment trust is 100% passive and sits at 30%.

The 80% threshold is generous, so mixed cases usually land on the right side. The ATO’s own example has a cafe company with $500,000 of trading income and $200,000 of rent traced through a trust: the rent is 28.6% of assessable income, so the company stays a base rate entity at 25%. The full test is on the ATO’s changes to company tax rates page (updated 4 September 2026), and our company tax rate guide carries six worked base rate entity examples.

The franking rate trap most owners never hear about

The rate you pay and the rate you can frank at are worked out differently. Tax is assessed on the current year, but the corporate tax rate for imputation purposes assumes turnover, assessable income and passive income match the previous year. Pay 30% this year and frank at 25% next, and five cents in every dollar of company tax is lost to the family. In practice, says Mina Baselyous, the mistake we see most is a bucket company that quietly accumulates investments until the passive percentage crosses the line, and nobody notices until the franking account will not support the dividend.

Do You Physically Pay the Cash, or Leave a UPE?

This is the central practical decision and it drives everything else. The trustee resolves to distribute, but the trust may or may not actually transfer the money. If it does not, the company holds an unpaid present entitlement: a real debt owed by the trust to the company, sitting on both balance sheets, while the cash keeps funding the trading business.

Paying the cash across is clean. The company holds its own money and section 100A exposure is lowest, because the beneficiary genuinely receives what it was given. The cost is that the business loses the use of the funds, which is often the whole reason the profit existed.

Leaving the entitlement outstanding keeps the cash working. Until June 2026 that carried a Division 7A problem, because the ATO treated an entitlement the company did nothing about as financial accommodation, and therefore a loan. That is no longer the law. The entitlement is still a genuine liability that must be documented properly, and money leaking out of the trust to the wrong people while it is outstanding still creates a deemed dividend.

What Bendel Changed, and What It Did Not

In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court dismissed the Commissioner’s appeal. A private company that simply does nothing about its entitlement to trust income does not provide financial accommodation under section 109D(3)(b), so a bare unpaid present entitlement is not a Division 7A loan and does not by itself produce a deemed dividend.

The ATO published its Decision Impact Statement on 26 June 2026 and accepted that outcome. Two points of housekeeping are worth stating precisely, because commentary has run them together. Taxation Ruling TR 2010/3 was withdrawn with effect from 1 July 2022, long before the case, when TD 2022/11 superseded it. And TD 2022/11 itself has not been withdrawn: the ATO has said in the Decision Impact Statement that it will withdraw the determination, but 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 things Bendel does not do. It does not unwind an entitlement already put on complying section 109N loan terms, which remains a loan and must keep being serviced. It does not touch money an owner actually draws out of the company, which is still a plain section 109D loan. And it does not narrow section 100A. Our full breakdown sits in Bendel, Division 7A and the unpaid present entitlement, with the wider rules in our Division 7A guide and the deemed dividend ceiling in distributable surplus.

What Still Bites: Subdivision EA and Section 100A

Two provisions now do the work the old UPE position used to do, and both survive Bendel untouched. Subdivision EA catches the trust while a corporate beneficiary’s entitlement is outstanding. Section 100A catches the arrangement itself, and has no time limit on amendment.

Subdivision EA applies where the trust pays an amount to, lends to, or forgives a debt of a shareholder of the corporate beneficiary or an associate, while the entitlement remains unpaid. In a normal family group the shareholder is you and the associate is your spouse, your trust or your other company. So the trust keeping the cash is fine. The trust keeping the cash and then paying your home loan is a deemed dividend.

Section 100A keeps experienced advisers careful. Where a beneficiary is made presently entitled under a reimbursement agreement and someone else enjoys the economic benefit, the entitlement is disregarded and the trustee is taxed at the top marginal rate. A company that keeps its entitlement in its own right is ordinarily fine. One whose entitlement is routinely applied for the parents’ benefit is the fact pattern the provision was written for. See our guide to section 100A reimbursement agreements and why trust distribution minutes matter.

The Top-Up Tax: Deferral Plus Smoothing, Not a Free 22 Points

The 25% is not the end of it. When the company eventually pays a franked dividend, the shareholder grosses it back up by the franking credit, pays tax at their own marginal rate, and offsets the credit. If that shareholder is on the top rate, the total tax across both entities is identical to distributing directly. The 22 points were borrowed, not won.

Run the same $170,000 forward. The company pays $42,500 and holds $127,500. Years later it pays that out fully franked with $42,500 of credits, so the shareholder declares $170,000 grossed up. At 47% that is $79,900 less the credit, leaving $37,400 to pay. Add the company’s $42,500 and you are back at $79,900 exactly. Nothing saved. Everything deferred.

Now change one variable. Say the shares sit in a family trust and the dividend is streamed to two adult beneficiaries with no other income, $85,000 grossed up each. Each pays $16,020 of tax plus $1,700 of Medicare levy against $21,250 of credits, so each gets a $3,530 refund. Total tax falls to $35,440, against $79,900 had the trust distributed to a top-rate individual.

That $44,460 is the real prize, and notice where it came from: not the 25% rate, but the choice of year and recipient at extraction. A bucket company buys the use of $37,400 of deferred tax as working capital, plus the option to release profit into a lower-rate year or across more beneficiaries. With no extraction plan you have bought the first and none of the second. See retained earnings explained and trust distribution strategies.

Who Should Own the Shares in the Bucket Company

Shareholding is decided once and is expensive to change, because moving shares is a CGT event. The common answers are the individual owners, a second family trust, or the existing trust. A trust as shareholder gives the most flexibility at extraction, which is exactly where the permanent saving lives. It also brings the franking credit rules into play.

Where a trust holds the shares, beneficiaries generally need to satisfy the holding period rule to be qualified persons entitled to the credits, which usually means the trust has made a family trust election. The ATO’s imputation guidance sets out the qualified person tests, and we cover it in full in holding a company inside a family trust. Read it before you sign the incorporation forms, not after. Separately, retained profit is a pot of money sitting behind whoever owns the shares, and you want it as far from trading risk as the structure sensibly allows. That is a business structuring question, and the reason we rarely use the trading company itself as the corporate beneficiary.

When a Bucket Company Is the Wrong Answer

A bucket company is wrong more often than the marketing suggests. It is wrong with no trust, because there is nothing to distribute from. It is wrong if you need every dollar personally each year, because the top-up falls due immediately. And it is wrong if nobody will maintain it.

• Your genuine surplus is modest. Below roughly $80,000 a year the saving struggles to justify a second tax return, an ASIC annual review and the advisory time to keep entitlements and resolutions clean.
• The trust’s income is mostly rent, interest or dividends. It traces through as passive, the company sits at 30%, and the gap narrows to 17 points.
• The trust income is mostly a capital gain. Individuals and trusts access the CGT discount, companies do not, so a discounted gain sent to a bucket company is taxed on the full amount. Very often the worse outcome.
• You intend to draw the money back out informally. That is a section 109D loan, and the complying loan rules follow you for seven years. Bendel changed nothing here.
• Your deed does not permit corporate beneficiaries and you will not vary it. A careless variation can resettle the trust, a far bigger problem than the tax you were saving.

How to Set One Up Properly

This is a structuring decision that has to be finished before 30 June, not a form lodged afterwards. Order matters: the deed check can change everything, and the resolution is the one step with a hard deadline. Allow a few weeks, not a few days.

1. Read the trust deed first. Confirm a company can be a beneficiary and that the eligible class covers one not yet incorporated. If not, have a lawyer draft the variation.
2. Decide the shareholding before you register, and consider the family trust election at the same time. Changing it later triggers CGT.
3. Register the company with ASIC, obtain a TFN and, where relevant, an ABN, and get director identification numbers.
4. Model the rate before you commit. Run the expected distribution through the section 23AA tests, and check the imputation rate for the year you plan to pay dividends.
5. Pass the trustee resolution before 30 June, naming the company and the amount or formula. Sign it, date it, keep it. This is what the ATO looks at first.
6. Decide the cash. Pay the entitlement across, or record it properly as an unpaid present entitlement, and make sure nothing then flows to a shareholder or associate that would trigger Subdivision EA.
7. Diarise it annually. The rate test, the resolution, the entitlement balance and the franking account all need revisiting. This is the part that quietly fails.

Done properly, a bucket company is one of the most durable planning tools available to an Australian family business. Done casually, it is a second entity that costs money, creates Division 7A and section 100A exposure, and delivers a saving the family can never efficiently extract. See our tax planning services or book a consultation with Mina to work through your own numbers before the year closes.

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