You have probably heard that trusts can be a great way to run your business — they give flexibility in how profits are shared, can protect assets, and may provide tax advantages.

But what happens when your trust earns more profit than you (or your family members) can use without paying high personal tax? That’s where a bucket company comes in.

A bucket company when used appropriately can help reduce your tax bill, protect your wealth, and give you more flexibility in managing your profits. Let’s break down what it is, why it matters, and when you might need one.

What Is a Bucket Company?

The term “bucket company” is a bit of accounting slang. Imagine your family trust as a jug that pours income into different cups — your family members. Each person pays tax on what they receive at their individual rates.

But what if the jug is too full, and pouring more into those cups means hitting the top personal tax bracket (up to 47%)? Instead, you can pour the “overflow” into a bigger container — the bucket company.

The company pays a flat tax rate (25% or 30% for small businesses). This caps the tax payable on that portion of income, rather than pushing family members into higher tax brackets.

Why Do Some People Use a Bucket Company?

1. Capping the Tax Rate

High-income individuals in Australia can pay up to 47% tax (including Medicare levy). If a trust distributes excess income to a bucket company, it’s taxed at a much lower rate (25% or 30%).

2. Flexibility in Distributions

Without a bucket company, trusts can only distribute to people or other trusts. That often means spreading income (and cash payments) across family members.

A bucket company gives another option — distribute the excess income & cash payments to the company instead of forcing it onto family members.

3. Reinvestment Opportunities

Profits retained in a bucket company can be reinvested into:

• Growing your business
• Buying investments (like property or shares)
• Building a financial buffer
• Becoming part of your succession planning strategies

This helps grow wealth without being forced to pull everything out of the trust each year.

4. Asset Protection

Funds held in a company are generally separate from personal assets. If you’re in a risky industry or worried about legal exposure, keeping wealth in a company can provide an extra layer of protection.

When Might It Make Sense?

People sometimes look at bucket companies when:

• Their trust generates more profit than family members can take on at lower tax rates.
• They have the cash available in their trust to pay to the bucket company
• They want to retain funds for reinvestment in a separate entity.
• They want an additional tool for tax planning and wealth protection.

Important Considerations

A bucket company can be powerful — but it isn’t suitable for everyone. Here are some key things to know:

• Division 7A Rules: If a trust distributes income to a company but then loans that money back to the trust or to individuals, strict rules apply. These are complex and must be managed carefully to avoid unexpected and expensive tax outcomes and penalties.
• No Capital Gains Tax Discount: Companies do not receive the 50% CGT discount that individuals and trusts can access.
• Extra Compliance: Establishing and running a company involves ASIC registration fees, annual reporting, and compliance obligations.
• Accessing Funds Later: Profits held in a company belong to that company. If they are later paid out to individuals as dividends, additional tax may be payable depending on the recipient’s personal situation.

A Practical Example

Let’s say:

• John the tradie runs his business through a trust.
• His trust earns $250,000 profit this year.
• John and his wife each take $90,000. That covers their household expenses and keeps them in a reasonable tax bracket.
• That leaves $70,000 profit still to be distributed.

Without a bucket company:
That $70,000 would be distributed to John or his wife, taxed at their higher marginal rate (say 39%) or $27,300.

With a bucket company:
The $70,000 is distributed and paid to the bucket company. The company pays just 25% tax ($17,500). $52,500 remains inside the company, ready for investment.

The Result: John’s family saves thousands in tax this year while building wealth in a protected structure.

Conclusion

A bucket company can be a useful option for business owners using trusts, offering flexibility in profit distribution and potentially reducing the overall tax burden. 

But it’s not a one-size-fits-all solution. Division 7A rules, CGT considerations, and compliance costs mean it’s essential to get tailored advice before setting one up.

If you’re running a trust and your profits are growing, it may be time to talk with your advisor about whether a bucket company should be part of your structure.

👉 Want to explore if this might suit your situation? Get in touch with us today — we’d love to discuss your goals and help you make the right call for your business.

 

Disclaimer

This article is for general information only and does not take into account your personal objectives, financial situation, or needs. It should not be relied upon as tax, legal, or financial advice. You should seek professional advice tailored to your circumstances before making decisions about business or investment structures.