Tax Planning Australia: Part 4 - Bucket Companies And How To Use Them Effectively
- Future Accounting
- 1 day ago
- 4 min read
Written by: Melissa Cunliffe
This is Part 4 of our tax planning Australia series, where we explore the key things to consider before 30 June.
In Part 3, we explored trust distributions and the importance of getting them right before 30 June. In Part 4, we focus on bucket companies—one of the most commonly used strategies in tax planning in Australia—and how to use them effectively without triggering unintended tax consequences.
What is a bucket company?
A bucket company is simply a company established with the intention of receiving trust distributions.
The purpose of this strategy is to cap the tax rate on income distributed from a trust.
Depending on the nature of the income, the company tax rate will generally be:
25% where the income relates predominantly to business profits (base rate entity rules apply)
30% where the income is passive in nature (such as rent, dividends, or interest)
This can provide a significant tax advantage compared to individual marginal tax rates.
Why bucket companies are used
Bucket companies are commonly used in tax planning in Australia to cap tax on excess trust income, retain profits for reinvestment, and support long-term wealth accumulation.
While effective, this strategy must be implemented and managed correctly.
When the strategy can go wrong
A common issue arises where a trust distributes income to a bucket company, but the cash does not actually flow to the company.
In these situations, Division 7A legislation in Australia can apply, creating unintended tax consequences.
Division 7A: what you need to know
Division 7A is complex, but the key takeaway is this:
If a loan arises between the company and the trust, it must either:
Be repaid in full before the earlier of the lodgement date or due date of the company’s tax return, or
Be placed on a complying Division 7A loan agreement
A complying loan agreement requires:
Minimum annual repayments
Interest to be charged at the ATO benchmark interest rate
For the 2025–26 financial year, the ATO benchmark interest rate is 8.77%.
This means:
The company will recognise interest income (and pay tax on it)
The trust will claim a corresponding interest expense
If the minimum repayments are not made, or the loan is not properly structured:
The ATO may treat the loan as an unfranked dividend
In simple terms, this means:
The amount is treated as income in the hands of the recipient
No franking credits are attached
Full tax is payable at the individual’s marginal tax rate
What makes a bucket company strategy effective
An effective bucket company strategy is one where:
Cash flows align with trust distributions, or
At a minimum, required repayments are physically made to the company
This ensures compliance and preserves the intended tax benefits.
Where managed correctly, the company can then:
Retain funds
Invest in its own right
Continue to cap tax on earnings
Franked vs unfranked dividends
When profits are paid out of the company, they can be distributed as dividends.
Franked dividends include a credit for tax already paid by the company, reducing the overall tax payable by the shareholder.
Unfranked dividends do not include any tax credits, meaning the full amount is taxed at the recipient’s marginal tax rate.
Franked dividends can be particularly effective where individuals are on lower tax rates, including during retirement.
A long-term wealth and retirement strategy
A bucket company should not be viewed in isolation—it forms part of a broader strategy.
When combined with:
A well-structured trust
A clear investment plan
A superannuation strategy
it can support:
Retention of family wealth
Asset protection
Retirement and estate planning
We’ll explore superannuation and retirement strategies further in Part 5 of this series.
Cash flow still matters
Cash flow is critical to the success of any tax planning strategy.
Your business must generate sufficient cash, manage debt effectively, and maintain appropriate reserves to support the structure.
We will explore cash flow and business scaling further in Part 6 of this series.
Take action before 30 June
If you’re currently using a bucket company, or considering one, now is the time to review your structure as part of your tax planning Australia strategy before 30 June EOFY.
Book your tax planning appointment with our team today and ensure your structure is compliant, effective, and working to maximise your long-term wealth.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
