What is a ‘bucket company’ and when do you need one?

The concept of a ‘bucket company‘ is used to describe a company into which distributions from a discretionary trust are made to cap the tax rate on the trust’s income to the flat company rate of 30%.

Generally the trustee will first look to distribute the trust’s income to a number of individuals who are on marginal tax rates at or below 30%. When those marginal rates have been fully utilised, any residual trust income is then directed to the company, i.e. it is put in the ‘bucket’.

Not surprisingly, the Tax Office is not a big fan of bucket companies, so great care needs to be exercised in the use of this strategy.

In particular, if the cash funds are left outstanding from the trust to the company – in the form of an ‘unpaid present entitlement’ – then Division 7A ITAA 97 can apply to deem the unpaid amounts to be assessable dividends. These dividends are generally treated as ‘unfranked’, so the effective rate of tax on the trust income can then exceed 64%. Division 7A issues can also arise if the cash is paid to another party, i.e. an associate of a shareholder in the company.

If the cash is actually paid to the company then the company will need to do something with it. If the company invests the cash in its own name then any investment income will also benefit from the flat company tax rate of 30%. However, any capital gains that the company may make on such investments will not benefit from the 50% CGT discount. Accordingly, investing the cash through the company may not result in the best longer-term tax outcomes.

The best thing the company can do with the cash is lend it to another entity under a complying Division 7A loan, and for that other entity to then invest the cash so as to qualify for a deduction on the interest paid back to the company. The company will then also pay a series of dividends over time to enable the other entity to fund the principal repayments on the loan.

So in short, the bucket company concept can be useful in managing short term and lumpy tax obligations of a trust. However, the strategy is not without its difficulties, and must be implemented extremely carefully.

Call Damien

For assistance with your trust distributions, contact us on 1300 654 590 or by email.


Our Great Lawyer Guarantee

We want to be part of your team over the long term. We'll achieve this by sticking closely to the following principles:

  • We'll listen carefully to understand what you want to achieve. Then we'll thoroughly explain our advice and step you through the documents. You can be sure you'll know the full consequences.
  • Our lawyers work as a team, so someone will always be available to answer your questions, or point you in the right direction. You will also benefit from a range of perspectives and experience.
  • One of our key goals is to pass on as much knowledge as we can, so you can make your own informed decisions. We want to make you truly independent.
  • We only do what we're good at. You can be confident that we know what we're doing and won't pass on the cost of our learning.
  • For advice and documents, we provide a fixed or capped quote so you don’t take price risk. If you're in a dispute, we'll map out the process and costs so you know what to expect.
  • We're not in this game for our egos. We're in it for a front row seat to witness your success

We measure our success on how efficiently we have facilitated your objectives, enhanced your relationships, and reduced the level of stress for all involved.

If we sound like people you can work with, call us now on 1300 654 590 and speak directly with a great lawyer.

Call 1300 654 590 and speak with a lawyer

You’ll be put straight through to a great lawyer who will guide you to the right solution.

Can employers require an employee to get a COVID 19 vaccination? 

Can employers require an employee to get a COVID 19 vaccination? 

On 25 January 2021, the Pfizer COVID 19 vaccination was approved for roll-out in Australia. This raises an important question – can employers require workers to be vaccinated against COVID 19? There is no hard and fast answer yet, but we can look to recent cases involving flu vaccinations for guidance. 

read more
What is a director’s role in a members’ voluntary liquidation?

What is a director’s role in a members’ voluntary liquidation?

If you are a director and member of a company and ready to shut down your solvent business through a members’ voluntary liquidation, you may be wondering how the process looks. In particular, you may be wondering what your role will be as the liquidation progresses.

Read more below to see how you may stay involved with the company throughout the liquidation process and how your role might change if you opt out.

read more
A Grandparent’s Family Law rights

A Grandparent’s Family Law rights

You may find yourself in a situation where your child or their partner is refusing to let you see your grandchildren or if you are playing a significant role in the care of your grandchildren, threatening to take them away. As a grandparent, you do not have an automatic right to see or care for your grandchildren, but this does not mean you are unable to do anything.

read more