With 30 June 2025 fast approaching, now is the time for business owners with discretionary or family trusts to think about how to cut down on tax and maximise profits.
A bucket company is one of the smartest ways to cap your tax at 25% or 30%, instead of getting hit with personal tax rates as high as 47%. This strategy ensures you’re not paying more tax than necessary while keeping more of your profits working for you.
In this guide, we’ll break down what a bucket company is, how it works and, most importantly, how much tax you could save. We’ll also cover key considerations like Division 7A loan rules, how to access funds from a bucket company and why you need to act before the end of the financial year.
Table of Contents
What is a Bucket Company and How Does it Work?
A bucket company is a company set up as a beneficiary of a trust. The term ‘bucket’ is used because the company acts as a container for trust profits, allowing you to distribute excess income to it, reducing tax exposure at the individual level. Instead of paying tax at higher personal rates, the trust can distribute profits to a company and cap the tax at 25% or 30%.
Key Features of a Bucket Company:
- A bucket company is a corporate beneficiary of a trust, meaning it receives distributions from the trust.
- It is not owned by the trust itself but can be owned by a trustee or a separate entity.
- The tax rate on distributions to the company is either 25% (Base Rate Entities) or 30% (all other companies), compared to the top individual tax rate of 47% (including Medicare Levy).
- Profits retained in the company can be reinvested in assets, reducing overall tax liability.
Tax Savings with a Bucket Company
Let’s break this down with an example. Imagine your trust earns $300,000 in profits from business. Without a strategy in place, you could be handing over more tax than you need to. Here’s what happens in two scenarios:
- Option 1: Distribute Profits 50/50 to Two Individuals
- Each individual receives $150,000
- Total tax (including Medicare levy) payable = $79,676
- Effective tax rate: ~26.6%
- Option 2: Use a Bucket Company
- Each individual receives $100,000
- Remaining $100,000 goes to a bucket company (taxed at 25%)
- Total tax payable = $70,576
- Effective rate: ~23.5%
- Tax saved: $9,100!
This strategy ensures that excess profits are taxed at a lower rate, rather than pushing individuals into higher tax brackets.
What Can You Do with the Money in a Bucket Company?
The retained profits in a bucket company can be used to:
- Invest in shares, property or other assets
- Lend to other businesses or entities (at a commercial interest rate)
Before implementing this strategy, speak with your accountant to ensure compliance. If the cash isn’t actually distributed to the company, you may need a Division 7A Loan Agreement, requiring scheduled repayments over seven years.
Why Tax Planning Matters
Tax planning isn’t just about paying less tax, it’s about keeping more of your profits to reinvest in your business, build wealth or fund future growth.
Without the right strategies in place, business owners can end up paying far more tax than necessary. While maximising deductions is one way to reduce tax, it often means sacrificing profits.
Instead of cutting profits, a bucket company strategy allows business owners to retain and protect profits while keeping tax liability at a manageable level.
Key Considerations Before Using a Bucket Company
While this strategy can lead to significant tax savings, there are a few key things to keep in mind:
Division 7A Loan Rules
If the bucket company receives a distribution but doesn’t actually receive the cash (i.e., the trust retains the funds), the amount is treated as a loan under Division 7A rules.
To stay compliant and avoid unexpected tax obligations, you’ll need a formal loan agreement with:
- Interest charged at benchmark rates
- Annual repayments
- A maximum loan term of 7 years
Eligibility for the 25% Tax Rate
Not all bucket companies qualify for the lower 25% tax rate. To be eligible, the company must be classified as a Base Rate Entity, meaning:
- Aggregated turnover is less than $50 million
- Less than 80% of income comes from passive sources (e.g., interest, dividends, rent)
Profit Management & Asset Protection
The cash in a bucket company can’t be freely withdrawn without triggering additional tax. However, retained profits can be strategically managed and invested in:
- Shares and managed funds
- Property investments
- Loans to other businesses or entities (at a commercial interest rate)
To add flexibility and asset protection, many business owners hold the bucket company shares in a separate trust rather than in their own name.
How to Get Money Out of a Bucket Company
Once profits are kept in a bucket company, here’s how they can be accessed:
- Paying Dividends: Shareholders can receive dividends with franking credits, reducing personal tax liability.
- Reinvesting Profits: Profits can be used to acquire assets like shares or property, building long-term wealth.
- Loaning Funds: The bucket company can lend money, but Division 7A loan rules apply, requiring interest and structured repayments
Act Now: EOFY Deadline Approaching
To implement this strategy before 30 June, businesses need to act now. Working with an accountant ensures:
- Correct structuring of the bucket company
- Compliance with Division 7A requirements
- Maximisation of tax savings
Don’t leave your tax savings until the last minute! If your trust generates significant profits, a bucket company could help you keep more of your hard-earned money. Get in touch with our team today and we’ll help you set everything up before EOFY 2025.
