When it comes to structuring a business or managing tax obligations in Australia, a bucket company is a term that often comes up. But what exactly is a bucket company, and how can it be used effectively in tax planning?
Understanding a Bucket Company
A bucket company is a company set up to receive and retain income distributions from a trust. It is commonly used in Australia to manage tax liabilities by acting as a beneficiary of a discretionary trust (also known as a family trust). Instead of distributing all profits to individuals who may be taxed at higher personal tax rates, a trust can distribute excess income to a bucket company, which is taxed at a flat corporate rate, currently at either 25% or 30%.
Tax Benefits of a Bucket Company
One of the key reasons business owners and investors use bucket companies is to take advantage of the corporate tax rate. As of 2025, the corporate tax rate is either 25% or 30%, compared to the highest personal income tax rate of 47% (including Medicare Levy).
By distributing income to a bucket company instead of an individual, the amount of tax paid can be significantly reduced, allowing for more working capital to be available to be used within the business.
How Does a Bucket Company Work?
- A family trust earns income from its investments or business activities.
- At the end of the financial year, the trustee decides on income distributions.
- Instead of distributing all income to individuals (who may pay high personal tax rates), the trustee distributes some or all of the taxable income to a bucket company.
- The bucket company pays tax on that income at the corporate tax rate (e.g., 25% or 30%).
- The remaining after-tax profits in the bucket company can be reinvested, loaned to other entities, or distributed to shareholders in a tax-effective manner in the future.
Considerations When Using a Bucket Company
While bucket companies offer tax advantages, there are important factors to consider:
- Dividends and Tax on Distribution
- Once the profits are inside the bucket company, withdrawing them could require the payment of dividends.
- These dividends may be subject to additional tax in the hands of shareholders.
- Franking credits can help reduce the tax burden when dividends are distributed.
We suggest you contact your tax accountant Melbourne who can further elaborate on how dividends operate.
- Controlled Loan Rules (Division 7A)
- If a shareholder or associate takes money from the bucket company without declaring it as a dividend or loaning it on commercial terms, Division 7A rules may apply.
- This can result in deemed dividends, leading to unexpected tax liabilities. Again, we suggest you contact your Melbourne business accountant to explain the operation of Division 7A.
- Corporate Compliance and Costs
- A company requires ongoing ASIC compliance, financial reporting, and tax lodgements.
- There are costs associated with setting up and maintaining a company structure.
- Note that more often than not, the tax benefits of using a bucket company will comfortably exceed the costs of running the bucket company. Don’t hesitate to arrange an appointment with Nobel Thomas who, as a no obligation free service, can help determine whether a bucket company is worth it for you.
Who Should Consider a Bucket Company?
A bucket company can be beneficial for:
- Business owners operating through a family trust who want to manage tax efficiently.
- High-income individuals looking to cap tax rates at no more than 30%.
- Investors holding assets through trusts that generate significant taxable income.
However, it is essential to seek professional advice from a tax accountant Melbourne or Melbourne business accountant to ensure compliance with ATO laws and to structure the bucket company properly.
Conclusion
A bucket company can be a powerful tax-planning tool when used correctly. By capping tax rates, business owners and investors can optimise wealth accumulation and reinvestment strategies. However, understanding the legal and tax implications, especially around Division 7A and dividend distributions, is crucial to ensuring the bucket company is used effectively without falling foul of the ATO.
If you are considering setting up a bucket company, consulting with a Melbourne business accountant, such as Nobel Thomas, will ensure that you maximise your tax benefits.
