The ‘tax-saving’ strategy we always argue against

Technically reviewed 8 October 2026 · General information only, not personal advice. Read our disclaimer.

There’s a strategy that gets pitched to growth-phase business owners more than any other in our market. Bookkeepers mention it. Cousins at barbecues mention it. Some accountants build their entire reputation on it. The pitch is: set up a bucket company, distribute the trust profits there at the corporate rate, save tax.

Most of the time, the answer we give clients is no.

Not because the structure doesn’t work. It can. But because the version that gets sold leaves out the two things that determine whether the structure actually saves tax or just defers it into a problem you’ll deal with later.

So before we get into when a bucket company earns its place, I want to put the actual mechanism on the table. A bucket company is a private company set up to be a beneficiary of a discretionary trust. The trustee distributes some or all of the trust’s profit to the company at year end instead of to the family members. The company pays tax at the corporate rate, which for a base rate entity (aggregated turnover under $50 million and no more than 80% passive income) is 25%. Compared with a 47% marginal rate including Medicare for the individual beneficiary, that looks like a tax saving of around 22 cents in the dollar.

It looks like that. It usually isn’t.

Why it’s deferral, not saving

Here’s the part the sell skips.

Money sitting inside a bucket company can’t just be spent on the family. It belongs to the company, and the company can use it for its own purposes: investing, lending on proper terms, funding a business. To get it out, the company has to declare a dividend, which is paid to its shareholder (often the family trust again, often the same individuals). When that dividend lands in the individual’s hands, it gets taxed at their marginal rate, with a franking credit offset for the corporate tax already paid. If the individual is still on top marginal rate when the dividend gets extracted, the total tax bill on that profit ends up roughly the same as if it had been distributed to them directly in the first place. The corporate rate paid earlier is just a credit against the marginal rate paid later.

So if the plan is “I’ll pull this money out next year to fund my lifestyle,” the bucket company isn’t saving tax. It’s collecting the same tax in two installments and adding a company tax return to your annual cost base.

Where the deferral does turn into a real saving is when the money stays in the company for a long time, gets reinvested in something that grows, and eventually gets extracted in a year where the individual’s marginal rate is genuinely lower (retirement, low-income year, structured exit). That’s a real plan. It’s also a different conversation than “let’s set one up because my cousin did.”

The tail nobody mentions in the sell

There’s a second issue, and it’s the one that catches half the bucket-company setups we see come in from elsewhere.

When a trust distributes profit to a bucket company on paper but doesn’t actually pay the cash across, that creates an unpaid present entitlement (UPE). For years the ATO treated an unpaid entitlement as a loan from the company back to the trust under Division 7A. In June 2026 the High Court disagreed (Commissioner of Taxation v Bendel [2026] HCA 18): a company that simply leaves its entitlement uncalled has not, on that ground alone, lent the money to the trust. Our Division 7A note covers the case in more detail. So the law has moved in the taxpayer’s favour: an entitlement that simply sits unpaid is not, by itself, a Division 7A loan. The legislative reaction has started, though: the government has said it will legislate to bring unpaid entitlements within Division 7A, and a 30% minimum tax on discretionary trusts from 1 July 2028 is now in draft legislation. Neither is law yet. Our firm policy has not moved, and those announcements are part of why. If you’re using a bucket company we want the cash to follow the paper, or the entitlement deliberately replaced with a properly documented loan on section 109N terms at the benchmark rate before the company’s lodgement day. That is a choice we make, not a rule the law imposes, and we make it because Subdivision EA and section 100A are untouched by the decision, because a later transaction between the trust and the company can still be a loan on the facts, and because a legislative response is now on the table. We explain which part is the law and which part is our way of managing the risk.

And independently of Bendel, Subdivision EA of Division 7A (ss 109XA–109XD ITAA 1936) catches a related trap, where a trust with an unpaid entitlement to a private company makes payments, loans, or forgives debts to the company’s shareholders or associates, those trust transactions can themselves be treated as deemed dividends from the company. Subdivision EA does not turn on whether a UPE is a “loan,” so Bendel does not affect it.

Many of the bucket company arrangements that come to us from other firms have not had this discipline applied.

The third issue is Section 100A. If the trust distributes to the corporate beneficiary on paper, but the cash benefit ends up in the hands of someone on a higher marginal rate (a parent, a related individual, a related entity), the ATO can treat the arrangement as a reimbursement agreement under section 100A and tax the trustee at the top marginal rate on the distributed amount. PCG 2022/2 sets out the ATO’s compliance zones (white for arrangements entered into before 1 July 2014, then green and red for everything since; the draft guideline’s blue zone did not survive into the final); TR 2022/4 sets out the technical position. Bucket-company-to-related-individual cash flows that aren’t carefully managed can sit in the red zone. The set-up that was pitched as a 22-cent-saving can flip into a 47-cent assessment with penalties on top.

This isn’t theoretical. It’s the second-most-common reason a new client comes to us looking for a clean-up.

When we’d actually use one

I’m not against bucket companies. I’m against the version of the sell that leaves out the discipline.

A bucket company earns its place when:

• the cash genuinely stays in the company and gets put to work (investments, retained earnings funding future business growth, long-horizon strategies)
• the UPE is either paid in cash before the company’s lodgement day or, as our firm policy rather than a legal requirement, replaced with a documented loan on section 109N terms at the benchmark rate, with the minimum yearly repayment paid every year for the life of the loan
• the cash flows respect Section 100A, distributions go to the entity that actually receives the benefit, and where they don’t, the arrangement sits clearly in the green zone, not the red
• there’s a genuine plan for eventual extraction in a year where the individual’s marginal rate is meaningfully lower, or the company gets used as the long-term holder
• the additional compliance cost (an extra company tax return, an extra ASIC fee, an extra set of resolutions and minutes) is in proportion to the tax outcome it actually delivers

When those conditions hold, a bucket company is a real piece of structure and we’ll happily set one up. When they don’t, what’s been sold is a problem with a 25% wrapper around it.

A bucket company isn’t a tax saving. It’s a tax deferral with homework. If the homework doesn’t get done, it’s not even a deferral.

The reason we argue against it more often than we argue for it isn’t ideology. It’s the maths, and the cost of the mess we keep being asked to clean up.

So if someone has told you that you should set up a bucket company this EOFY because it’ll save you tax, the questions to ask back are: where is the cash actually going to sit, who’s going to manage the UPE, is the distribution path going to land in the green zone or the red zone, and is the company’s income mix going to keep it at the base rate of 25% or push it to the general rate of 30% under the BREPI test. If the person doing the pitch can’t answer those four with confidence, they’re not pitching you a tax strategy. They’re pitching you a problem you’ll be paying us, or someone like us, to fix in two years.

The structure is fine. The pitch usually isn’t.

Raise higher.