What the Proposed Tax Changes Mean for Your Trust and Bucket Company
The trust-and-bucket-company structure has been used by Australian property investors for decades to manage rental income and reduce tax. Under the original Budget proposal released earlier this year, this arrangement would have become unworkable due to double taxation. The exposure draft legislation released on 3 September introduced a possible way forward called the fixed-distribution election, but it comes with a significant trade-off.
These proposed changes are not yet law. This article is general information only and does not constitute tax or financial advice. You should speak with your accountant or tax adviser before making any decisions about your trust structure.
How Bucket Companies Have Worked for Property Investors
A bucket company receives distributions from a family trust and pays tax at the corporate rate, which currently sits between 25% and 30% depending on the company's circumstances. Rental income accumulates in the company at this lower rate rather than being taxed at the individual's top marginal rate, which can be substantially higher.
Profits held in the company can later be paid out as franked dividends, giving investors control over when they draw income and trigger personal tax. This flexibility has been particularly valuable for investors with strong rental income and high personal tax rates who want to defer or smooth their income over time.
The Double Tax Problem That Was Proposed
Under the original Budget proposal, trusts would have paid a 30% minimum tax at the trust level on income that wasn't distributed to certain eligible beneficiaries. Corporate beneficiaries would receive no credit for this tax. The bucket company would then be taxed again on the same income when it received the distribution from the trust.
Consider a trust receiving $100,000 in rental income and distributing it to a bucket company. The trust would pay $30,000 in tax, leaving $70,000. The company would then receive the $70,000 but be assessed for tax on $100,000, paying another $30,000. The effective tax rate would have exceeded 50%, making the structure commercially unworkable for most investors.
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What the Fixed-Distribution Election Allows
The fixed-distribution election lets trusts already in existence at 1 July 2028 nominate one or more beneficiaries and commit to distributing future income in fixed percentages. A nominated beneficiary can include an eligible bucket company.
Where the trust complies with the election, the 30% minimum tax does not apply at the trust level. The bucket company is taxed directly on the trust distribution, avoiding the double-tax problem. The election does not require a restructure and is not expected to result in state or territory stamp duties.
Once the election is made and percentages are locked in, future distributions must comply with those percentages. Beneficiaries generally cannot be added or changed, except in limited circumstances such as death or family breakdown.
What You Give Up When You Make the Election
The trust can no longer redirect income each year to whoever in the family is on the lowest marginal rate. If one family member takes time out of the workforce, or another starts earning significantly more, the distribution percentages remain fixed.
Consider a family with two adult children. At the time the election is made, both are working full-time and the trust distributes 50% to a bucket company and 25% to each child. Three years later, one child takes parental leave and is on a much lower income. The trust cannot increase their distribution percentage to take advantage of their lower tax rate. The original percentages must be maintained.
An inconsistent distribution could automatically revoke the election, with serious tax consequences. The trustee could be taxed at the highest marginal rate plus Medicare levy in the year of revocation, and the ordinary 30% minimum tax regime would then apply in subsequent years.
Who the Election Is Most Likely to Suit
Investors whose rental income is consistently directed to a bucket company and whose family circumstances are stable may find the election works well. If you value tax efficiency over flexibility and have a clear long-term plan that doesn't rely on shifting distributions between family members each year, the election may allow you to continue operating your structure without the double-tax problem.
Those who do not rely on year-to-year income splitting among individual family members, and who are comfortable locking in a distribution pattern for the long term, are in the strongest position to consider the election.
Who Should Think Carefully Before Committing
Families with varying incomes where the ability to split income each year is valuable should weigh the loss of flexibility carefully. If your financial circumstances or family structure are likely to change, the inability to adjust distributions could become costly.
Investors who anticipate significant changes in family circumstances, such as children entering or leaving the workforce, or who hold growth assets in the trust where capital gains may be an important consideration, should speak with their adviser about whether the election suits their situation. The decision to make the election is a significant long-term commitment with limited ability to reverse course.
What Happens Next
No immediate action is required. The legislation is not yet law and may change as it moves through Parliament. The election would only become relevant for trusts in existence at 1 July 2028, and even then it remains optional.
Review your current trust and bucket company arrangement with your accountant well before 2028. Consider whether the election would suit your circumstances, or whether restructuring or another approach would serve you better in the long term. The loss of flexibility is permanent once the election is made, so the decision deserves careful consideration and professional advice.
If you're financing investment property through a trust structure or considering a loan refinance that takes these proposed changes into account, call one of our team or book an appointment at a time that works for you. We work with accountants and tax advisers to help investors structure their lending in ways that align with their overall tax and investment strategy.
Frequently Asked Questions
What is the fixed-distribution election for trusts?
The fixed-distribution election allows trusts in existence at 1 July 2028 to nominate beneficiaries and lock in fixed distribution percentages. This avoids the proposed 30% minimum tax at the trust level, but removes the ability to vary distributions each year.
Will the bucket company structure still work after the proposed tax changes?
Yes, if the trust makes the fixed-distribution election. The bucket company can continue to receive distributions and be taxed at the corporate rate, avoiding double taxation. However, the distribution percentage to the company must remain fixed once the election is made.
What happens if I make the election and then want to change the distribution percentages?
Changes are generally not allowed except in limited circumstances such as death or family breakdown. An inconsistent distribution could automatically revoke the election, resulting in the trustee being taxed at the highest marginal rate plus Medicare levy in the year of revocation.
When do I need to decide about the fixed-distribution election?
No immediate action is required. The legislation is not yet law and the election would only become relevant for trusts in existence at 1 July 2028. You should review your structure with your accountant well before that date.
Who should consider making the fixed-distribution election?
Investors whose rental income is consistently directed to a bucket company and whose family circumstances are stable may benefit. Those who value tax efficiency over flexibility and don't rely on year-to-year income splitting among family members are in the strongest position to consider it.
