How a Bucket Company Could Help You Reduce Tax

If you run your business using a discretionary or family trust, one smart move to reduce tax before the end of the financial year is to set up a bucket company. This strategy can help lower your overall tax rate by distributing income from your trust to a company, where profits are taxed at a lower corporate rate.

What is a Bucket Company?

A bucket company, also known as a corporate beneficiary, is created to receive income from a trust. Under Australian tax law, companies are taxed at a fixed rate, generally 25% for smaller businesses (base rate entities) or 30% for others. This rate is much lower than the top individual tax rate of 47% (including the Medicare levy).

By redirecting some income from your trust to a bucket company, you can keep the tax rate on that income lower rather than having it taxed at the higher rates applied to individuals.

An Example for Construction Professionals

Imagine your trust earns $250,000 in taxable income for the 2025 financial year.

Scenario 1 – Distribute equally to two individuals:

• Each person gets $125,000.

• Combined tax paid: approx. $61,576.

• Effective tax rate: 24.6%.

Scenario 2 – Distribute income more strategically:

• $90,000 to each individual and $70,000 to a bucket company taxed at 25%.

• Combined tax paid: approx. $56,676.

• Tax savings: $4,900.

  
  

What Happens to the Money in the Bucket Company?

Funds held in the bucket company can be put to work in several ways:

• Investments: Use money to acquire assets such as shares or real estate.

• Lending: Provide loans to related entities at fair interest rates.

• Reinvest in operations: Grow your business with the retained profits.

• Pay dividends: Issue franked dividends to shareholders later, subject to the availability of franking credits.

With a bucket company, you'll lower your tax bill while maintaining control over how and when to use the funds.

Things to Keep in Mind

While this strategy can save a lot on tax, it comes with specific rules:

• Division 7A compliance: If the cash stays in the trust or is used by shareholders, proper loan agreements must be in place to avoid penalties.

• Corporate tax eligibility: Only businesses with a turnover under $50 million and limited passive income qualify for the 25% corporate tax rate.

• Franking considerations: If you plan to pay dividends later, ensure franking credits are appropriately managed.

• Fit within your strategy: A bucket company should align with your broader tax, investment, and estate planning goals.

Plan Ahead

Tax planning should not be left to the last minute. With June approaching, now is the time to assess whether a bucket company is right for you.

Ignite Accountants understands the needs of the construction industry. We can help you establish a bucket company, ensure compliance with tax laws, and integrate it into your financial strategy.

Let's Build Your Strategy.

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Tim Goode

Managing Director | Ignite Accountants