A bucket company is a corporate beneficiary that receives discretionary trust distributions and caps the tax on retained profits at the company rate. The 2026 Federal Budget announced a 30 per cent minimum tax on discretionary trusts from 1 July 2028, with no credit for corporate beneficiaries. The effective tax rate on bucket company distributions under the announcement is contested, and the final legislation decides which reading stands.
The High Court’s Bendel decision of 10 June 2026 separately confirmed that an unpaid present entitlement is not, of itself, a Division 7A loan. Owners of trust and bucket company structures now hold a two year window to test their position and sequence any restructure.
What Is a Bucket Company and Why Did the Strategy Work?
A bucket company caps the tax on surplus trust income at the company rate of 25 or 30 per cent. The structure has anchored Australian SME tax planning for two decades. A discretionary trust runs the business or holds the investments.
Family members on lower marginal rates receive distributions first. Surplus profits flow to the corporate beneficiary, the bucket company, and sit there taxed at the company rate. Top-up tax to personal rates only arrives when the company pays dividends.
Deferral, retention, and asset separation made the bucket company the default pressure valve for trust income. The 2026 Federal Budget targets exactly this design.
What Did the 2026 Budget Change for Bucket Companies?
The 2026 Federal Budget announced a 30 per cent minimum tax on discretionary trust income from 1 July 2028, with no credit for corporate beneficiaries. The measure was announced on 12 May 2026 and awaits legislation. Trustees pay the minimum tax on the taxable income of the trust.
Non-corporate beneficiaries receive non-refundable credits for the trustee tax. Corporate beneficiaries receive nothing. The Treasury fact sheet frames the exclusion as deliberate, blocking taxpayers from cycling trust income through a company and converting trustee tax into franking credits.
The design produces double taxation where a bucket company sits in the chain. The trustee pays tax on the income, and the company pays tax again on its entitlement. Fixed trusts, widely held trusts, superannuation funds, deceased estates, and charitable trusts sit outside the announced scope. A bucket company receiving from a discretionary trust sits squarely inside it.
How High Does the Effective Tax Rate Go?
The effective tax rate on bucket company distributions under the announcement is contested, and the exposure draft decides which reading stands. The competing readings are set out below:
- Current law: the company pays 25 or 30 per cent on its entitlement. Top-up tax to a maximum of 47 per cent arrives only when dividends reach individuals. Deferral is the benefit.
- Early industry reading: the company is assessed on its entitlement net of the trustee tax. Combined rates land near 51 per cent under the models circulated after Budget night.
- Full assessment reading: Sladen Legal reads the Treasury fact sheet as assessing the company on the full entitlement with no credit. Trustee tax then stacks on company tax across the whole amount. Combined rates push towards 55 to 60 per cent before any dividend.
- Post-dividend models: several advisory firms model outcomes above 60 per cent once dividends flow to shareholders and top-up tax applies.
We present the range rather than a single figure because the fact sheet wording supports more than one reading. Every reading lands in the same strategic place. Distributions to a bucket company stop working as a tax cap from 1 July 2028 under the announced design.
How Does the Bendel Decision Change UPEs?
The High Court held that an unpaid present entitlement owed to a corporate beneficiary is not, of itself, a Division 7A loan. Commissioner of Taxation v Bendel [2026] HCA 18, decided on 10 June 2026, dismissed the ATO appeal by a 5-2 majority. The decision overturns the position the Commissioner maintained since 2009, under which unpaid entitlements demanded complying loan agreements with annual principal and interest repayments.
The win carries conditions. The majority reasoning turned on the specific trust deed, where distribution resolutions set income aside on separate trust for the company. Deeds and resolutions drafted differently sit outside the fact pattern. Subdivision EA still bites where trust funds flow to shareholders or their associates while an entitlement stays unpaid.
Section 100A and Part IVA remain live, and the ATO decision impact statement is still pending. Our guide to Division 7A and CGT rollover deemed dividends covers the wider deemed dividend framework. Bendel loosens yesterday’s UPE problem. The Budget announcement reshapes tomorrow’s bucket company strategy, and both forces arrived within one month of each other.
What Happens to Existing UPEs Under the Minimum Tax?
The Budget papers stay silent on unpaid present entitlements owed to bucket companies before 1 July 2028. The legislation must clarify the treatment of pre-existing UPEs, and no announcement answers the question today. Existing complying Division 7A loan agreements over historical UPEs remain legally operative regardless of Bendel, because signed loan terms bind the parties.
Family groups holding material UPE balances face a genuine sequencing question. Calling for payment, leaving entitlements outstanding, and repaying loan agreements each carry different outcomes under the announced rules and under Bendel.
Watch-and-wait is the defensible position for most groups until the exposure draft lands. Groups with loan agreements maturing before 2028, or with Subdivision EA exposure, need earlier answers. We map every UPE balance, its documentation, and its maturity dates before recommending any move.
What Are the Options for Trust and Bucket Company Structures?
Four options exist for trust and bucket company structures: redirect distributions, restructure into a company, convert to a fixed trust, or hold position. The options are compared below:
- Redirect distributions: beneficiaries on marginal rates at or above 30 per cent lose nothing under the announced minimum tax. Groups with enough such beneficiaries keep the trust and retire the bucket company quietly.
- Restructure into a company: the announced rollover relief runs from 1 July 2027 for three years and covers moves into companies. Retained profits then face one layer of company tax rather than two.
- Convert to a fixed trust: fixed trusts sit outside the announced minimum tax. Our analysis of fixed trust vs discretionary trust restructuring weighs that conversion decision in full.
- Hold position: the measure awaits legislation, and design details move between announcement and law. Holding costs nothing before 1 July 2028.
The right option turns on beneficiary profiles, unrealised gains, UPE balances, and asset protection needs. Modelling all four against real numbers beats intuition every time.
Which Situations Force Action Before 2028?
Business sale plans, maturing loan agreements, and each year’s distribution resolutions force decisions before the minimum tax starts. Owners planning an exit face the sharpest timing pressure, because the Budget also rewrote capital gains outcomes. Our analysis of selling your business under the 2026 CGT changes covers that intersection. A sale completed while the trust structure still works cleanly beats a sale negotiated mid-restructure.
Division 7A loan agreements over historical UPEs keep their repayment schedules until refinanced or repaid. Trust distribution resolutions for FY27 and FY28 lock in entitlement positions year by year. Each resolution now deserves modelling against the announced rules, not a repeat of last year’s minute.
How Does Franking Interact With the Minimum Tax?
The announcement requires trustees receiving franked dividends to apply the franking credits against the minimum tax first. Treatment of excess franking credits remains under consultation. Bucket companies holding retained profits also hold franking accounts built at 25 or 30 per cent. Dividends paid out of those profits carry the credits with them.
Shareholder outcomes on those dividends follow the ordinary imputation rules. Our guide to franked vs unfranked dividends explains how the credits work in shareholder hands. Franking positions built before 2028 keep their value under the announcement. The exit sequence for retained profits becomes a planning question in its own right.
What Stays the Same for Bucket Companies?
Asset separation, profit retention, and the small business CGT concessions survive the announced changes. A bucket company still quarantines retained profits away from trading risk. Companies never held the 50 per cent CGT discount, so the announced discount removal changes nothing for them directly.
The small business CGT concessions on an eventual sale remain intact under the announcement. A bucket company keeps a role as a retention and protection vehicle. The announcement removes its role as a tax cap on trust income, and that distinction drives every option above.
What Mistakes Are Owners Making Right Now?
Restructuring before the law exists, reading Bendel as a blanket green light, and assuming old UPEs are grandfathered are the current mistakes. The common errors are listed below:
- Restructuring on an announcement. Design details move between fact sheet and Bill, and an early restructure locks in assumptions the law rewrites.
- Treating Bendel as universal. The decision turned on specific deed terms, and Subdivision EA plus section 100A still apply.
- Assuming grandfathering. Nothing in the Budget papers protects pre-2028 UPEs, and silence is not an exemption.
- Ignoring the franking exit. Retained profits leave the company eventually, and the dividend sequence deserves its own plan.
Frequently Asked Questions
When does the 30 per cent minimum tax on trusts start?
The announced minimum tax applies from 1 July 2028, subject to legislation passing. The measure was announced in the Federal Budget on 12 May 2026.
Do bucket companies get a credit for the trustee tax?
Corporate beneficiaries receive no credit for trustee tax under the announcement. Non-corporate beneficiaries receive non-refundable credits. The exclusion is deliberate and blocks franking conversion.
What is the effective tax rate on bucket company distributions from 2028?
The rate is contested, with readings ranging from about 51 per cent to above 60 per cent once dividends flow. The exposure draft decides which reading stands, and we model both for clients today.
Did the Bendel case save the bucket company strategy?
Bendel resolved the Division 7A treatment of unpaid entitlements, not the minimum tax. The decision confirms a UPE is not, of itself, a loan. The announced 30 per cent minimum tax still removes the tax cap benefit from 1 July 2028.
Are existing UPEs caught by the new rules?
The Budget papers give no answer on pre-2028 unpaid entitlements. The legislation must clarify the treatment, and material UPE balances justify a documented watch-and-wait plan now.
Is winding up the bucket company the right response?
Retention, protection, and franking value argue against a reflex wind-up. The company loses its tax cap role under the announcement and keeps its other roles. Modelling decides, not momentum.
Key Takeaways: Bucket Companies Before 1 July 2028
Bucket companies lose their tax cap role under the announced minimum tax, and the response window runs to 1 July 2028. The core points are summarised below:
- Corporate beneficiaries receive no credit for the announced 30 per cent trustee tax, producing double taxation on trust distributions.
- The effective rate is contested between roughly 51 per cent and figures above 60 per cent, and the exposure draft settles it.
- Bendel confirms a UPE is not, of itself, a Division 7A loan, subject to deed terms, Subdivision EA, and section 100A.
- Pre-2028 UPEs sit in a legislative gap, and material balances deserve a documented plan before the rollover window opens on 1 July 2027.
Family groups running a trust and bucket company structure hold two years to test their position. Book your free 30-minute strategy session with one of our directors. We model the contested readings against your numbers, map every UPE balance, and sequence the response around the rollover window. Blackwattle Tax helps Australian family groups and business owners restructure with specialist, director-level attention.
Schedule a FREE 30-minute consultation today to discover how we can help you make strategic decisions and streamline your business operations.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.