Bucket Company Tax Rate: How to Cap Your Tax at 25% in Australia

If you're a high-income earner in Australia, you could be paying up to 45% in income tax, plus the Medicare levy. But what if there was a legitimate way to cap your tax rate at just 25%? That's exactly what a bucket company strategy can offer. In this guide, we'll explain everything you need to know about the bucket company tax rate, how it works, and whether it's the right strategy for your financial situation.

What Is a Bucket Company?

A bucket company is a private company that's used as part of a tax minimisation strategy, typically by business owners, investors, or high-income earners operating through a trust structure. The name "bucket" comes from the way these companies act like a bucket, collecting and holding income that would otherwise be distributed to individuals at higher tax rates.

Here's how it typically works: instead of distributing all trust income to individual beneficiaries (who might pay up to 45% tax), some of that income is distributed to a bucket company instead. Because the bucket company pays a flat corporate tax rate, you can significantly reduce the overall tax paid on that portion of your income.

It's important to note that bucket companies are completely legal when set up and operated correctly. The Australian Taxation Office (ATO) recognises these structures, but they do scrutinise them closely to ensure compliance. This is why getting professional advice from an accountant who specialises in tax structures is absolutely essential before implementing this strategy.

Understanding the Bucket Company Tax Rate for FY 2025-26

For the 2025-26 financial year, the bucket company tax rate is 25%. This applies to most bucket companies that qualify as base rate entities. To be a base rate entity, a company must have an aggregated turnover of less than $50 million, and no more than 80% of its income can be passive income (such as rent, interest, or dividends).

Let's put this 25% rate into perspective. If you're a high-income earner, every dollar you earn over $190,000 is taxed at 45%, plus the 2% Medicare levy, bringing your total marginal tax rate to 47%. By distributing some of your trust income to a bucket company instead, you could be saving 22 cents in tax for every dollar distributed.

These savings can add up significantly over time. For example, if you distribute $100,000 of trust income to a bucket company instead of taking it personally when you're in the top tax bracket, you could save $22,000 in tax for that year alone. To understand how different income tax rates affect your overall financial position, use our online calculator tools.

How the Bucket Company Strategy Works in Practice

Let's walk through a practical example to see how a bucket company can work in real life. Imagine Sarah, who runs a successful consulting business through a family trust. Her business earns $300,000 in net profit for the year. Without a bucket company, all that income would need to be distributed to Sarah and her family members personally.

Sarah's spouse already earns $100,000 from his job, and her children are still in school with no other income. She could distribute some income to her children, but there are special rules about distributions to minors that limit the tax effectiveness. If she takes the remaining profit herself, she'll pay the top marginal tax rate on a significant portion.

Instead, Sarah sets up a bucket company as a beneficiary of her family trust. She distributes $100,000 to herself, $37,000 to her spouse (bringing him to the $135,000 threshold), and the remaining $163,000 to the bucket company. The company pays 25% tax on its distribution ($40,750), while Sarah and her spouse pay personal tax at their marginal rates on their distributions.

The money stays in the company and can be used for investments, held as working capital, or potentially loaned back to the business. This approach gives Sarah flexibility in managing her tax position and building wealth over time. For a clearer picture of what you'll actually receive after tax in any scenario, check out our take-home pay calculator.

Important Considerations and Compliance Requirements

While the bucket company strategy offers significant tax advantages, it's not without its complexities. The ATO has specific rules about how these structures must operate, and failing to comply can result in penalties and additional tax. One key requirement is that distributions to a company must be properly documented and actually paid or properly dealt with by the end of the financial year.

If the bucket company doesn't actually receive the cash distribution from the trust, the amount may be treated as a loan from the company to the trust or the individuals. This triggers Division 7A rules, which require these loans to be either repaid or put on commercial terms with minimum interest and repayment requirements. Getting Division 7A wrong is one of the most common and costly mistakes with bucket company structures.

Another important consideration is how you'll eventually access the money in the bucket company. If you take it out as dividends later, you'll pay personal tax on those dividends but receive a franking credit for the tax already paid by the company. This means the total tax you pay eventually approaches what you would have paid personally, but the timing advantage and ability to invest pre-tax dollars can still make the strategy worthwhile.

You'll also need to consider how the bucket company fits with your other financial obligations. If you have a HECS-HELP debt, for example, the income distributed to the bucket company doesn't count toward your repayment income. This could affect your repayment obligations and should be factored into your planning. Similarly, if you're making salary sacrifice contributions to superannuation, you'll need to coordinate these strategies effectively.

Is a Bucket Company Right for You?

A bucket company structure isn't suitable for everyone. Generally, it makes the most sense for business owners, investors, or professionals who operate through a trust and have income that fluctuates or consistently exceeds the threshold where higher marginal tax rates kick in. If you're earning well above $135,000 per year and have a trust structure, it's definitely worth exploring.

The strategy works best when you have a genuine reason to accumulate funds in a company structure, such as future business expansion, investment opportunities, or as a way to manage income timing between financial years. If you're simply trying to avoid tax without a legitimate purpose, the ATO may view this unfavourably, and the costs of compliance may outweigh the benefits.

Setting up and maintaining a bucket company involves costs, including company registration, annual ASIC fees, accounting fees for compliance and tax returns, and potentially legal advice. These costs might range from $2,000 to $5,000 per year, so you need sufficient income flowing through the structure to justify the expense. As a rough guide, many advisors suggest you need at least $50,000 to $100,000 of income that can be diverted to the company annually for the strategy to be cost-effective.

Conclusion

The bucket company tax rate of 25% for FY 2025-26 offers a compelling opportunity for high-income earners to reduce their tax burden and build wealth more efficiently. By diverting trust income to a corporate beneficiary instead of taking it all personally, you can potentially save thousands of dollars in tax each year.

However, this is a complex area of tax law that requires careful planning and ongoing compliance. Division 7A rules, trust distribution requirements, and the eventual extraction of funds from the company all need to be managed correctly. Working with an experienced accountant who understands these structures is essential.

If you're considering a bucket company strategy, start by reviewing your current income levels, trust structure, and financial goals. Calculate the potential tax savings, factor in the compliance costs, and get professional advice tailored to your specific situation. With the right setup and advice, a bucket company can be a powerful tool in your tax planning arsenal.