Tax Tip 239: Bucket Companies and Diversion of Income to Adult Children with no tax payable

The bucket company strategy can allow income to be completely tax free under certain limited circumstances.


How it works is that you would set up a discretionary trust and have it invest. Any income generated from the investment could be distributed to a company that does nothing other than receive trust income, in other words, a bucket company. The company would pay tax at a rate of 30% and then lend this money back to a discretionary trust, under a division 7A loan agreement. This would be done for a number of years with the capital of the investments compounding. Since this can save up to 17% in tax straight away there is much more available to compound.


The shares of the bucket company will hopefully be held by a separate discretionary trust of which the children will be beneficiaries.

The income will then be paid to the adult children when they reach the age of 18 and not working. This is because these ‘kids’ will be taxed as adult.


If a young adult then earns less than $20,000 including franking credits not only won’t they pay tax, but they will get back tax the company has already paid.

So, 2 adult kids going to uni and not working could be drawing out $40,000 pa tax free for say 4 years. This could mean $160,000 built up and retained earnings get released from the company tax free.