How to Reduce Tax on Trust Distributions Using a Bucket Company

A practical guide for Ipswich families, business owners and investors who want to use a discretionary trust and a corporate beneficiary without falling foul of Division 7A, section 100A or Part IVA, updated for the current state of the Bendel litigation.

A discretionary trust gives you flexibility over who receives income each year. Used well, that flexibility is one of the most effective tax planning tools available to a family business. Used casually, it becomes a compliance problem. The single biggest lever inside the trust is the choice of beneficiary, and for many Ipswich business owners, that choice increasingly involves a bucket company.

This article sets out how the strategy actually works, where it saves tax, and the specific traps that catch most families. It assumes you already have a trust, or are seriously considering one.

What is a bucket company, and how does it fit inside a trust structure?

A bucket company is a private company used as a beneficiary of a discretionary trust. The trust resolves to distribute part of its annual income to the company, and the company pays tax on that distribution at the corporate rate rather than the individual beneficiaries’ marginal rates. The name is industry shorthand; there is nothing special about the company itself, other than the role it plays.

The logic is straightforward. Adult beneficiaries who already earn solid incomes from wages, business profits or investments pay tax on trust distributions at their marginal rate, which in Australia tops out at 47% including Medicare levy. A company beneficiary pays tax at either 25% (if it qualifies as a base rate entity) or 30%. On meaningful trust income, the gap is significant.

The structure does not make tax disappear. It changes when and where tax is paid. That distinction is the single most important thing to understand before using one.

The basic structure: trust, trustee, beneficiaries, bucket company

The discretionary trust sits at the centre, controlled by a trustee (usually a corporate trustee). Each financial year, the trustee decides how the trust’s distributable income is allocated among beneficiaries permitted by the deed. Those beneficiaries typically include parents, adult children, related entities and, if the deed supports it, a private company.

Individual beneficiaries usually receive what the family needs for living costs, school fees, loan repayments and lifestyle. The bucket company receives the surplus the family doesn’t need to extract personally in that year. That’s why advisers describe it as a profit retention and tax planning tool, not a tax saving shortcut.

When this strategy actually suits you

A bucket company is worth considering when three things are true at once:

• Your trust regularly generates more taxable income than the family needs to receive personally.
• One or more adult beneficiaries are already at or near the top marginal tax threshold from other income.
• You have the discipline to maintain proper records, resolutions, and Division 7A documentation year after year.

It’s less useful when the family spends all trust profits each year, when bookkeeping is chronically behind, or when the main motivation is simply to park money at a lower rate with no plan for what happens next. In those cases, the company often defers tax rather than reduces it, and the compliance overhead outweighs the benefit.

What are the actual tax benefits?

The benefit is best understood in two parts: the immediate tax reduction, and the deferral opportunity that follows.

Capping the immediate tax rate on surplus trust income

If the trust distributes $100,000 of otherwise surplus income to an adult beneficiary already earning $200,000, almost all of it is taxed at 47%. If the same $100,000 is distributed to a bucket company taxed at 25%, the immediate tax bill on that slice drops by roughly $22,000. That’s the headline number most clients focus on, and in a year where trust profits spike, it can materially change the family’s cash position.

The deferral opportunity

The company tax paid isn’t wasted. It creates franking credits that attach to dividends paid later. This means profits can sit inside the company while the business grows, debt is reduced, or a spouse takes time off work, and dividends can be released in a future year when personal tax rates are lower. If the eventual shareholder’s marginal rate matches or falls below the company rate, franking credits soak up the top-up tax. If it’s higher, the family still pays the difference later, but on their schedule rather than the ATO’s.

This is why the structure works best when paired with a genuine multi-year plan. Without one, the bucket company becomes a deferral tool only, and sometimes not even that.

The base rate entity question

A bucket company is not automatically taxed at 25%. To qualify as a base rate entity, its aggregated turnover must be under the threshold and no more than 80% of its assessable income can be passive (rent, interest, dividends, royalties, net capital gains). A company that receives most of its income as trust distributions from a passive investment trust will often fail this test and pay 30%. That materially changes the maths, and it’s regularly missed in back-of-envelope planning.

Key rules to get right before making distributions

The tax outcome depends on legal mechanics being correct. Three things need to line up, the deed, the company’s standing as a beneficiary, and the trustee resolution.

The trust deed controls everything

The deed is the governing document, not the accountant’s spreadsheet. It defines who can be a beneficiary, how income can be allocated, whether capital gains and franked distributions can be streamed, and what counts as “income” in the first place. Many older Ipswich deeds use narrow beneficiary definitions that don’t clearly include a newly incorporated company, even when the family members behind that company are obviously within the intended class. Review the deed before you need it, not the week of 30 June.

If the deed needs amending, take advice on whether amendment powers have been validly exercised. A poorly executed variation can trigger resettlement, which causes bigger problems than the tax you were trying to save.

Resolutions must be valid and on time

For a discretionary trust, the trustee generally needs to resolve distributions by 30 June (or earlier if the deed requires it). A late, vague, or deed-inconsistent resolution can result in the trustee being assessed on undistributed income at the top marginal rate under section 99A. That outcome is worse than any bucket company can fix.

Resolutions also need to distinguish between trust law income (what the deed defines) and net income for tax (what section 95 defines). These aren’t always the same. Template resolutions that ignore the deed’s specific income definition are a common source of trouble during ATO review.

Records Ipswich trustees should keep

The ATO expects documentation that proves the structure was in place and the decisions were made properly. At minimum, keep:

• Signed trust deed and every variation, plus family trust elections and interposed entity elections.
• Company constitution, ASIC records, and evidence the company falls within the beneficiary class.
• Signed trustee resolutions dated on or before 30 June, financial statements, and workpapers showing how trust income was calculated.
• For unpaid present entitlements: loan agreements, Division 7A documentation, ledger entries, and repayment schedules.
• For dividends: franking account records, dividend minutes and statements.

What are the risks?

A bucket company is legitimate. It becomes a problem only when it’s implemented badly, and unfortunately, that’s more common than it should be. Three risk areas dominate: Division 7A and unpaid present entitlements (UPEs), the anti-avoidance rules, and the unsettled state of the law following the Bendel case.

Division 7A, UPEs and the Bendel uncertainty

A UPE is created whenever a beneficiary is made presently entitled to trust income but the cash isn’t actually paid. For a bucket company, a UPE appears whenever the trust resolves to distribute income to the company but retains the funds, typically to keep using them as working capital.

For 15 years, the ATO’s position (most recently in TD 2022/11) was that a UPE owed to a corporate beneficiary effectively became a loan for Division 7A purposes in the year after the entitlement arose. That meant the UPE needed to be placed on a complying Division 7A loan agreement, written agreement, benchmark interest (8.37% for 2025–26), minimum yearly repayments, seven-year term unsecured, or converted into a compliant sub-trust. If it wasn’t, the ATO could treat the amount as an unfranked deemed dividend.

In February 2025, the Full Federal Court disagreed with the ATO. In Commissioner of Taxation v Bendel [2025] FCAFC 15, the Court held unanimously that a UPE owed to a corporate beneficiary is not a loan for section 109D purposes, because it creates an obligation to pay rather than an obligation to repay. The ATO was granted special leave to appeal to the High Court, which heard the matter on 14 October 2025. As at April 2026, the High Court’s decision is pending, expected in the first half of 2026.

The ATO’s interim position is unambiguous: it continues to administer TD 2022/11, meaning it will still treat unconverted UPEs as loans until the High Court rules. More importantly, the ATO has publicly signalled that regardless of how Bendel is decided, section 100A and Subdivision EA of Division 7A remain live. If company profits referable to a UPE flow through to an individual shareholder, directly or via the trust, Subdivision EA can still produce a deemed dividend. And where a UPE sits without commercial terms, the arrangement falls outside the green zone of PCG 2022/2 and attracts section 100A attention.

The practical position for 2025–26 is therefore straightforward, even if the law isn’t. Until the High Court rules and any administrative or legislative follow-up lands, the safe play remains either paying the distribution across to the company in cash, or placing the UPE on complying Division 7A terms. Waiting for Bendel before taking action is a calculated risk, not a strategy, and it needs to be taken with full awareness of the section 100A and Subdivision EA fallback provisions the ATO has already flagged.

The common failure pattern hasn’t changed: a trust distributes to a bucket company three years running, never pays the cash, has no loan documentation, and by year four the UPE is six figures with inconsistent records. Whatever the High Court decides on Division 7A, that pattern is a problem.

Section 100A and Part IVA

Section 100A targets “reimbursement agreements”, arrangements where a beneficiary is made presently entitled to trust income, but the real economic benefit flows to someone else on a better tax rate. The ATO’s 2022 guidance (PCG 2022/2) sharpened its focus on trust distributions that don’t match the actual benefit, and a bucket company structure that’s primarily a paper arrangement sits squarely in the risk zone.

Part IVA, the general anti-avoidance rule, can apply where a scheme’s dominant purpose is to obtain a tax benefit. Warning signs include circular cash movements, backdated resolutions, distributions to entities with no genuine role, and arrangements where the family spends the company’s money without proper wages, loans or dividends. None of these features are automatically fatal, but together they make an arrangement hard to defend.

The protection against both provisions is the same: commercial substance, consistent documentation, and a clear reason for retaining profits that doesn’t reduce to “we wanted a lower tax rate.”

How much tax can you actually save?

The honest answer is: it depends on four variables.

• Trust income. The bigger the surplus above what the family needs to draw, the larger the benefit.
• Other beneficiary income. If another adult is already in a low bracket, distributing to them often beats using a company.
• Company tax rate. Base rate entity status (25%) versus the standard rate (30%) changes the outcome meaningfully.
• Exit plan. Money that stays in the company for several years preserves the deferral. Money extracted quickly for personal use largely reverses it.

A realistic Ipswich example: a family trust running a trade business earns $300,000. The two directors already have combined personal income of $380,000 from wages and prior distributions. Distributing the $300,000 to them adds roughly $141,000 in tax at 47%. Distributing $200,000 to a base-rate-entity bucket company and $100,000 to a low-income adult child instead drops the combined immediate tax bill by around $40,000, provided the child is a genuine beneficiary with actual entitlement to the funds, and section 100A is respected.

If the company later pays that retained profit back out as fully franked dividends to those same high-income directors, most of the $40,000 reverses. If it stays in the company to fund equipment, working capital, or a later dividend to a retired shareholder, the saving largely sticks. The structure rewards patience.

Practical steps to set up a bucket company properly

A well-implemented structure takes weeks, not days. The sequence matters more than most people realise.

Choosing the company structure and shareholding

The bucket company is typically a private company limited by shares. The share ownership question deserves more thought than it usually gets. Options include individual family members holding shares directly, or a separate discretionary trust holding them. Each has consequences for future dividend flexibility, estate planning, asset protection, and who controls retained profits if family circumstances change.

A common mistake is making one spouse the sole director and shareholder because it’s simple. Ten years later, if the marriage changes or a restructure is needed, that decision constrains every option. Choose the shareholding structure with succession and flexibility in mind, not just this year’s tax return.

Coordinating your accountant and lawyer

The tax and legal sides of a bucket company strategy can’t be separated. Your accountant models the tax impact, franking position, and Division 7A treatment. Your lawyer reviews the deed, drafts any amendments, and confirms the company is a valid beneficiary. When these two streams don’t talk to each other, the tax plan fails at the legal level or the legal setup misses a tax consequence. Neither adviser can solve the problem alone.

The practical version of this: before 30 June, your accountant and lawyer should both have eyes on the deed, the company’s beneficiary status, the planned resolution, and the cash flow plan for any unpaid entitlement. That coordination is where most of the quality of the advice lives.

Questions to ask before you commit

• Does the trust deed clearly permit distributions to this specific company, and has it been reviewed in the last three years?
• Is there a genuine commercial reason to retain profits in a company rather than distribute to individuals?
• If cash won’t physically move, what’s the Division 7A plan, sub-trust, complying loan, or something else?
• Will the company qualify for base rate entity status given its expected income mix?
• Who owns the shares, who controls future dividends, and does that match our estate and succession plans?
• Who is accountable for maintaining ASIC records, Division 7A loan schedules, and annual compliance?

The mistakes that cost families the most

Distributing to an entity that isn’t a valid beneficiary

The single most common technical failure. A newly incorporated company doesn’t automatically qualify as a beneficiary just because the family controls it, the deed’s beneficiary definition has to cover it, or a valid nomination needs to be made under the deed’s procedures before 30 June. When this step is missed, the distribution fails, default beneficiaries may become entitled, and the trustee can end up assessed at the top marginal rate.

Betting on Bendel without understanding what’s still live

Some taxpayers have read headlines about Bendel and concluded that UPEs no longer matter. That’s the wrong takeaway. Until the High Court rules, the ATO is still administering TD 2022/11. Regardless of the High Court outcome, section 100A and Subdivision EA remain in play wherever company profits referable to a UPE end up benefiting individual shareholders. Leaving a UPE to drift because “Bendel won at the Full Federal Court” is a risk position, not a plan, and if the High Court reverses the decision, taxpayers who’ve abandoned complying loan arrangements will need to unwind that decision quickly.

Treating deferral as elimination

A bucket company caps the initial tax rate. It doesn’t make the tax disappear. When dividends are later paid to shareholders on high marginal rates, top-up tax applies. The structure works brilliantly when retained profits fund business growth or await a lower-income year. It works poorly when families expect to withdraw the money for personal use within a year or two, at that point, they’ve essentially added complexity and compliance cost for a small timing benefit.

Treating year-end resolutions as a template exercise

Every year, some Ipswich trusts run the same resolution they ran last year, with the numbers updated. If the deed’s income definition has nuances, if streaming is involved, if a beneficiary’s circumstances have changed, or if the company’s base rate entity status has flipped, the templated resolution may no longer work. Resolutions are worth drafting properly each year.

When to get professional tax advice

The moments that typically warrant tailored advice rather than DIY are recognisable. A bucket company discussion becomes more urgent when:

• Trust income is trending upwards and regularly exceeds what the family needs to draw.
• A profit spike is likely, a major contract, asset sale, capital gain or catch-up year.
• Adult children have moved into professional income brackets and are no longer useful low-rate beneficiaries.
• The trust deed hasn’t been reviewed in five or more years.
• Existing UPEs are growing and no one is quite sure where they sit given the Bendel uncertainty.
• You’re preparing for a refinance, investor, or sale and the balance sheet needs to make sense to an outside party.

In each of these situations, the value of coordinated advice far exceeds its cost, not because the tax rates are complicated, but because the compliance architecture around them is. A structure that reduces tax by $30,000 a year and creates a $100,000 Division 7A problem in year four is not a win.

Used well, a bucket company is one of the better tools available to a profitable family business. The test isn’t whether it saves tax on paper. The test is whether your deed, your resolutions, your cash flows and your records still tell a consistent, defensible story three years from now.

At Wiseman Accountants, we help Ipswich families and business owners make these decisions properly, before 30 June, not after. If your trust is producing more income than your family needs to spend, it’s worth a conversation.