A bucket company is a separate company used to receive surplus business profits at lower tax rates (25-30%) instead of distributing them to individuals taxed at marginal rates up to 47%. It “catches” excess income from a family trust, allowing business owners to save tax and build wealth over time. From there, the bucket company pays tax at the company rate and retains the after-tax profits to invest.

Here’s a step-by-step example of how a bucket company works in 2026.

Australian Tax Rates

To understand why bucket companies can be an effective strategy, you need to know how Australian tax rates work.

  • Individuals pay tax on a marginal scale. The higher your income, the more tax you pay on each extra dollar earned. Once you pass $190,000 in annual income, your marginal tax rate is around 47 cents per dollar (including Medicare levy).
  • Companies pay a fixed tax rate. Small business entities pay 25% on their profits, and larger companies and investment companies 30%.

This gap between the top individual rate and the company rate is the key reason bucket companies are so useful. Instead of paying nearly half your income in tax, you can move surplus business profits into a bucket company and have them taxed at a lower overall marginal rate.

How Does a Bucket Company Work?

A bucket company forms part of a broader tax structure between different entities. Here’s how it typically works:

  1. Operating Company – Your main trading business, earning the profits.
  2. Discretionary Trust (Family Trust) – Owns the shares in your operating company, receives dividends and decides how to distribute the income each financial year.
  3. Bucket Company – A separate company (owned by the trust) that receives additional income when it’s not tax-efficient to distribute it to individual beneficiaries.

The trust acts as the decision-maker. Each financial year, it can distribute income to beneficiaries on lower tax rates first (such as a spouse with little income). Once those beneficiaries have used up their tax-free thresholds and lower tax brackets, the remaining profits can be allocated to the bucket company instead of going to an individual taxed at the top rate.

How Income Flows in Practice

Here’s a step-by-step example of how a bucket company works in practice:

  1. Profit Generation – Your operating company earns a $500,000 profit in FY24.
  2. Dividend to Trust – The operating company distributes a dividend to its shareholder (the family trust).
  3. Trust Allocates Income –
    • $70,000 to your spouse (low tax rate)
    • The remaining $430,000 to the bucket company
  4. Tax at Lower Rate – The bucket company pays tax at 25–30% instead of someone on top marginal rates personally paying 47% on that income.

Bucket company structure diagram showing flow from operating company to family trust to bucket company

What Happens to the Money in the Bucket Company?

Once the bucket company has received the distribution, it can:

  • Invest in shares, property, or other assets.
  • Lend funds to other entities (with correct loan documentation to comply with tax rules).
  • Retain profits for future use.

At some point in the future (i.e. when you retire or when your income is much lower), the bucket company can pay dividends to shareholders (often the trust), which then distributes them in a more tax-effective way. The bucket company declares a fully franked dividend and pays that out it its shareholder. If you have more franking credits that ta payable, you get a cash refund.

Benefits of a Bucket Company

The main advantages of using a bucket company include:

  1. Tax Savings – Potentially save thousands by paying company tax rates on surplus profits instead of high marginal rates.
  2. Asset Protection – The investments held by the bucket company are separate from your trading business, reducing risk if something happens to the operating company.
  3. Wealth Building – The bucket company can become a long-term investment vehicle, growing in value year after year.
  4. Generational Wealth – Shares in the bucket company can be passed down, allowing children and grandchildren to benefit from accumulated assets.

Key Considerations and Risks

While the potential tax benefits of this strategy can be attractive, there are strict rules and important risks to be aware of:

  • Not Suitable for PAYG Employees – This approach only works if you have an active business and a trust structure in place. It cannot be used by employees without a business.
  • Division 7A Rules – Any funds taken from the bucket company must comply with Division 7A loan agreement requirements. Failure to do so can trigger significant additional tax. You must have a clear, compliant process for extracting cash from the investment entity.
  • Unpaid Present Entitlements (UPEs) – Division 7A issues can also arise where a trust retains profits owed to the company, so UPE management is critical.
  • Family Trust Election – You may need to make a Family Trust Election to secure certain tax benefits, which can also limit the range of eligible beneficiaries.
  • Ongoing Costs – Establishing and maintaining an additional company and trust comes with setup, accounting, and compliance costs, which may outweigh the benefits in some cases.
  • Need for Professional Advice – This structure must be tailored to your specific circumstances, including asset protection and estate planning needs. The team at JD Scott + Co can help design and implement a compliant, effective solution.

Long-Term Impact

One of the biggest hidden advantages of a bucket company is the compounding effect. By saving tax and reinvesting those extra funds each year, your investments can grow significantly over time.

For example, if you save $50,000 in tax each year and invest it through the bucket company at an average return of 7% annually, after 10 years you could have over $690,000, making it a useful strategy for tax efficiency.

When implemented correctly, a bucket company can become one of the most powerful tools in your business structure. But it’s not a one-size-fits-all solution. The setup, ownership, and long-term plan need to be carefully designed with professional advice.

Used well, a bucket company isn’t just about saving tax this year. It’s about protecting assets, building investments, and creating wealth in the long term.

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