Introduction: What Is a Bucket Company?

For Family Trusts, managing excess income and reducing overall tax liability can be a balancing act. One popular strategy is to set up a bucket company—also known as a dump company—which acts as a corporate beneficiary (a Company that acts as a beneficiary) for a family trust. By distributing surplus income from the trust to this corporate beneficiary, you can take advantage of corporate tax rates, leaving more money within the family group to invest and grow.

Let’s dive into how a bucket company works, its benefits, and some of the factors to consider before setting one up.

How a Bucket Company Works

A bucket company is essentially a corporate beneficiary created to receive excess income distributed from a discretionary (family) trust. Here’s how it’s commonly used:

1. Distributing Excess Income: When the individual beneficiaries of a family trust do not need additional income or have hit the highest tax bracket (45% on income over $190,000 for the 2025 FY), distributing more income to them would trigger higher personal taxes unnecessarily.
   This excess income can be distributed to a bucket company instead.
2. Utilizing Corporate Tax Rates: Instead of distributing to individuals, the trust can direct excess income to the bucket company. The company pays tax on this income at the corporate tax rate, which is generally between 25% and 30% (depending on the source of income).
3. Tax Deferral: By retaining the income in the bucket company, family members can indirectly defer personal taxes until a time when funds are withdrawn as dividends, potentially allowing for more flexible tax planning in the future.

This approach is often useful for families looking to grow wealth for the family group while minimizing tax costs.

Benefits of a Bucket Company

Setting up a bucket company comes with multiple tax and financial benefits, making it a popular choice for family trusts that receive high levels of income. Here are some of the primary advantages:

1. Lower Tax Rate on Excess Income

• By distributing to a bucket company, the income is taxed at the corporate tax rate (between 25% – 30%) rather than the individual’s top marginal rate of 45%.
• This can lead to substantial tax savings, especially for high-income families looking to retain more funds for investment or business growth. Keeping more money after tax means you have more to invest with.

2. Investing Retained Profits at Lower Tax Rates

• Once the income is in the bucket company, it can be reinvested in an account under the name of the Company (i.e. a bank account or a share trading account). Any profits generated from these investments are also taxed at the company’s rate, providing a tax-efficient way to grow the family’s wealth.
• For example, if the bucket company invests in shares, the dividends and capital gains earned by the company will also be taxed at the lower corporate rate, maximizing after-tax returns.

3. Flexible Income Distribution

• Unlike a direct distribution to individuals, income in the bucket company can be paid out as dividends at a later date. This allows the family group to time the release of funds to individuals when their taxable income may be lower.
• For instance, if family members retire or have a low-income year, the company could issue dividends, allowing them to take advantage of a lower personal tax rate on the distribution.

Drawbacks of Using a Bucket Company

While the bucket company strategy has distinct advantages, there are also some additional costs, complexities, and compliance requirements. Here’s what to consider:

1. Extra Setup and Ongoing Costs

• Setting up a bucket company involves initial registration costs and annual ASIC fees. You’ll also have to account for additional annual accounting and tax compliance costs associated with a separate corporate entity.
• These costs can add up over time, so it’s important to ensure the tax savings outweigh the expenses.

2. Properly Managed Funds and Accounts

• Any funds distributed to the bucket company must be handled appropriately. This means opening a separate bank or investment account in the company’s name to ensure the income is accounted for and managed independently of personal finances.
• Mixing funds with personal accounts could lead to compliance issues and may complicate tax reporting for both the trust and the company.

3. Increased Complexity and Administration

• Adding a corporate beneficiary to a family trust structure introduces additional administrative complexity. Trustees need to carefully document distributions to the bucket company and ensure all legal requirements are met.
• Annual tax returns and financial reports for the bucket company can require extra time and effort, and more complex tax strategies often require guidance from an accountant or tax advisor.

Is a Bucket Company Right for You?

Using a bucket company as a corporate beneficiary is ideal for those who:

• Have a high-income family trust where individuals have reached or exceeded the top tax bracket.
• Want to retain funds within the family group for reinvestment rather than immediate personal use.
• Are comfortable with the additional compliance and administrative costs associated with a corporate structure.

For families with lower taxable incomes or less need to retain funds within the company, a bucket company may not provide sufficient tax savings to justify the added complexity.

We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.

This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.