Cap Your Tax with a Bucket Company

A Smart Tax Planning Strategy for 2025

As we approach 30 June 2025, it’s time to start thinking about tax planning strategies that can significantly reduce your tax bill, especially if you operate through a discretionary (family) trust. One of the most effective strategies available is the use of a “bucket company” to help cap the tax payable on trust distributions. This is particularly relevant for business owners and primary producers with strong trading profits and growing trust income.

What is a Bucket Company?

A bucket company is a corporate beneficiary of a trust. Its primary purpose is to receive trust distributions and have those amounts taxed at the corporate tax rate, capped at either 25% or 30%, depending on the company’s classification. This is significantly lower than the top marginal individual tax rate of 47% (including Medicare Levy), making it a valuable tool to help you retain more of your profits within your group structure.

A Simple Example – The Power of Tax Capping

Let’s say your trust earns $250,000 in business profits.

Option 1: No bucket company

Profits are distributed equally to Individual 1 and Individual 2.

Total tax payable (including Medicare Levy): $61,576 (Effective tax rate: 24.6%)

Option 2: Use of a bucket company

Distribute $90,000 each to Individuals 1 and 2, and the remaining $70,000 to a bucket company (taxed at 25%).

Total tax payable: $56,676 (Effective tax rate: 22.6%)

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Result: You save $4,900 in tax.

Note: If the cash is not physically paid to the bucket company, a Division 7a loan agreement must be put in place and repaid over seven years, including interest, to avoid additional tax implications.

How Can You Use the Cash Retained in a Bucket Company?

Funds retained in the company can be used for:

• Investing in shares, managed funds, or agricultural property

• Lending to other entities within your group (at commercial interest rates)

• Funding future business expansion, equipment purchases, or succession planning

For agriculture and primary production clients, this strategy can be particularly valuable when managing seasonal income fluctuations, drought years, or succession funding. Bucket companies can act as a tax-efficient cash reservoir that allows you to reinvest back into the farm or agribusiness without triggering personal tax liabilities immediately.

Key Considerations

• The corporate tax rate applied (25% or 30%) depends on whether the bucket company qualifies as a base rate entity, which we can assess for you.

• A bucket company must be legally established and properly included in your trust deed as a beneficiary before year-end.

• Division 7a compliance is essential if the distributed funds are not physically transferred to the bucket company.

• Planning must occur before 30 June 2025 to be effective.

How We Can Help

As your accountants and advisors, we will:

• Review your trust structure and assess eligibility

• Determine the correct corporate tax rate applicable

• Establish or update your bucket company structure (if needed)

• Prepare and document Division 7a loan agreements where applicable

• Tailor a tax strategy aligned with your business or farm’s long-term goals.

Let’s Talk Strategy Before 30 June

If you’re expecting a profitable year or want to ensure your tax affairs are structured for efficiency, now is the time to act. We’ll help you assess whether a bucket company strategy is suitable and how it can be integrated into your broader tax and investment plan.

Contact us to discuss your 2025 tax planning. We’re here to help you make the most of your hard-earned profits—whether you’re running a professional practice, a retail business, or a thriving agricultural operation.