A bucket company family trust is a widely used structure in Australian tax and trust law, combining the discretionary flexibility of a family trust with the corporate stability of a private company. In this arrangement, a company—often called the “bucket company”—is nominated as a beneficiary, allowing surplus trust income to be distributed at the flat corporate tax rate instead of being taxed at higher personal marginal rates. This mechanism provides a legally robust solution for families seeking asset protection, intergenerational wealth planning, and tax efficiency.
Beyond the tax advantages, a bucket company also introduces strict compliance obligations under the Income Tax Assessment Act 1936 (Cth), Division 7A rules, and the Corporations Act 2001 (Cth). Trustees must balance flexibility with fiduciary duties, ensuring distributions are documented properly and company interactions meet statutory standards. When implemented correctly, a bucket company family trust can serve as a cornerstone for both wealth preservation and legal compliance in Australia.
What Is the Primary Purpose of a Bucket Company in a Family Trust?
The primary purpose of a bucket company in a family trust is to cap tax liabilities. Instead of distributing all trust income to individual beneficiaries—who may face marginal tax rates of up to 45%—the trustee can distribute excess income to the bucket company, where it is taxed at the corporate tax rate (approximately 25–30%). This structure allows for:
- Long-term accumulation of profits for reinvestment.
- Asset separation between the company and individuals, strengthening protection.
- Control over when and how profits are later paid out to shareholders as dividends, often with franking credits.
How Do Family Trusts Distribute Income to Bucket Companies?
Income is distributed to a bucket company by trustee resolution in compliance with trust and tax law. Key steps include:
- Confirming the Trust Deed – the deed must expressly name the company as an eligible beneficiary.
- Passing a Trustee Resolution – before 30 June each year, the trustee must resolve in writing how much income is allocated to the company.
- Recording and Reporting – the distribution is reflected in accounting records and reported for tax purposes.
- Division 7A Compliance – if the funds are accessed by shareholders or associates, payments must comply with Division 7A rules to avoid being treated as unfranked dividends.
This process ensures income is lawfully streamed to the company while satisfying Australian Taxation Office (ATO) requirements.
Why Use a Bucket Company with a Family Trust?
A bucket company is used with a family trust to achieve greater tax efficiency and governance stability. The advantages include:
- Tax capping – excess trust income is taxed at the lower corporate rate.
- Asset protection – funds retained in the company are shielded from beneficiaries’ personal risks.
- Reinvestment flexibility – retained earnings can be used to expand investments or fund family businesses.
- Credibility with third parties – lenders and regulators view corporate beneficiaries as more structured and transparent.
This structure is particularly valuable for high-income trusts that generate more profit than can be distributed efficiently among individual beneficiaries.
Tax Advantages of a Bucket Company Family Trust
Key advantages include:
- Lower tax rate: Distributions taxed at the corporate rate instead of up to 47% for individuals.
- Deferral strategy: Retained earnings in the bucket company can be reinvested without immediate distribution to individuals.
- Dividend planning: Later dividends can be franked, giving shareholders credit for tax already paid by the company.
Risks and Disadvantages of Using a Bucket Company
Despite benefits, the structure is not without drawbacks:
- Division 7A compliance: Payments, loans, or forgiven debts to shareholders may be deemed unfranked dividends unless strict loan agreements are in place.
- Higher compliance costs: Requires ASIC reporting, corporate governance, and specialist tax advice.
- Loss of flexibility: Retained earnings cannot be accessed personally without triggering further tax consequences.
Australian Tax Rules for Bucket Companies and Family Trusts
The ATO closely monitors distributions to bucket companies. Key rules include:
- Distributions must be genuine and within the terms of the trust deed.
- Division 7A applies where funds leave the company for shareholder or associate use.
- Beneficiaries must be correctly defined in the trust deed, or distributions may be invalid.
Courts have repeatedly emphasised substance over form, striking down arrangements that fail to comply with statutory requirements.
Bucket Company vs Individual Beneficiaries
When comparing, the key legal and financial differences are:
- Bucket company: Flat tax rate, asset protection, stricter compliance.
- Individual beneficiary: Simpler administration, but higher marginal tax rates and exposure to creditors or family law claims.
For families generating significant trust income, the bucket company often provides greater overall efficiency and protection.
Steps to Establish a Bucket Company Family Trust
To set up this structure, families must:
- Draft or amend a trust deed allowing corporate beneficiaries.
- Incorporate a proprietary limited company under the Corporations Act 2001 (Cth).
- Appoint directors and ensure they understand fiduciary duties.
- Register the company with ASIC and obtain a TFN and ABN.
- Pass trustee resolutions distributing income to the bucket company.
Legal and accounting advice is indispensable, as errors may invalidate the structure. For families unfamiliar with complex trust law, guidance on finding a good family law lawyer can be critical to ensure the trust is established correctly and complies with Australian regulations.
Is a Bucket Company Beneficial for Small Business Owners?
Yes, small business owners often benefit from this structure where trust profits exceed individual tax thresholds. Retaining income in the company allows reinvestment at a lower tax rate while protecting assets from personal liabilities. However, compliance costs and Division 7A rules must be factored into decision-making.
Requirements for a Corporate Trustee Using a Bucket Company
Where the trustee is itself a company, the structure becomes layered. Legal requirements include:
- Director duties under the Corporations Act 2001 (Cth).
- Proper record-keeping of trustee resolutions and company accounts.
- Avoidance of conflicts of interest where the same individuals control both entities.
This dual structure is common but demands higher governance standards.
Alternatives to a Bucket Company in Family Trust Tax Planning
Families may consider other structures where a bucket company is unsuitable, such as:
- Testamentary trusts providing concessional tax treatment to minors.
- Unit trusts for unrelated investors requiring fixed entitlements.
- Companies as primary trading vehicles where reinvestment flexibility is critical.
Each option carries different legal and tax implications.
Ongoing Compliance and Administration
Maintaining a bucket company family trust requires:
- Annual trustee resolutions by 30 June.
- Company reporting to ASIC.
- Properly documented Division 7A loan agreements where relevant.
- Tax return lodgements for both trust and company.
Failure to comply may result in penalties, deemed dividends, or invalid trust distributions.
FAQs on Bucket Company Family Trust
Before implementing this structure, families often ask:
What is the primary purpose of a bucket company within a family trust?
To act as a beneficiary and receive excess trust income at the corporate tax rate.
How do family trusts distribute income to bucket companies?
Through trustee resolutions before 30 June, documented in accordance with trust law and ATO rules.
What are the tax advantages of using a bucket company?
Reduced tax on distributions, retention of profits for reinvestment, and access to franking credits on dividends.
What are the risks of using a bucket company?
Division 7A compliance burdens, higher ASIC and legal costs, and limited personal access to retained earnings.
Bucket company vs individual beneficiaries — which is better?
Bucket companies provide tax efficiency and asset protection; individuals offer simpler access but higher taxes.
What are the steps to establish a bucket company family trust?
Amend the deed, register a company, appoint directors, and pass trustee resolutions with professional oversight.
Conclusion
For families, business owners, or high-net-worth individuals considering this structure, professional legal and accounting guidance is indispensable. A tailored strategy ensures the trust operates not only as a tax planning mechanism but also as a resilient legal framework for long-term wealth management.
If you are exploring whether a bucket company family trust suits your needs, engaging an experienced adviser is the best first step. Platforms like LegalFinda connect families with specialist lawyers who can provide the legal clarity, compliance oversight, and strategic advice required to implement and maintain this structure effectively.
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