A possible lifeline for bucket-company arrangements
The Federal Government has this week released exposure-draft legislation concerning the proposed 30% minimum tax on discretionary trusts, scheduled to commence from 1 July 2028.
Importantly, the latest proposal includes a new election that may allow existing family trusts to continue distributing income to a nominated bucket company without paying the additional 30% tax at the trust level.
These measures are only proposed legislation and may change before becoming law.
What was originally proposed?
The 2026–27 Federal Budget proposed that discretionary trusts would pay a minimum tax of 30% on their taxable income from 1 July 2028.
Under the original proposal, where income was distributed to a bucket company:
- the trust could pay tax at 30%;
- the bucket company could also be taxed on the same income; and
- the company would not receive a credit for the tax paid by the trust.
This could have resulted in the same income effectively being taxed twice, making traditional bucket-company arrangements commercially unattractive.
What has changed?
The exposure draft introduces an alternative election for discretionary trusts already in existence at 1 July 2028.
Under the proposed election, a trust could nominate one or more existing beneficiaries and commit to distributing future income to those beneficiaries in fixed percentages.
A nominated beneficiary may include an eligible bucket company.
For example, a family trust could nominate its bucket company to receive 100% of future trust distributions. Provided the trust complies with the election:
- the 30% minimum tax would not apply at the trust level;
- the bucket company would be taxed directly on the trust distribution;
- the earlier potential double-tax outcome would be avoided; and
- the trust would not need to transfer its assets or formally restructure into a company or fixed trust.
The Government has also indicated that making the election should not, by itself, produce state or territory transfer duty.
Potential benefits
The election could preserve many of the benefits of an existing bucket-company arrangement, including:
- allowing trust income to be accumulated in a company;
- limiting the initial tax on that income to the applicable company tax rate;
- deferring personal top-up tax until dividends are ultimately paid;
- allowing the company to pay franked dividends in later years; and
- avoiding the cost and complexity of transferring the trust’s business or investments into another entity.
Where the bucket company is owned by another family trust, future franked dividends may still be distributed by that shareholder trust among family beneficiaries, subject to the ordinary tax, trust and integrity rules.
What are the disadvantages?
The election involves a significant loss of flexibility.
Once the trust nominates its beneficiaries and their fixed percentages:
- future distributions must comply with those percentages;
- beneficiaries generally cannot be added or changed, except in limited circumstances such as death or family breakdown;
- the trust may no longer be able to redirect annual income among family members according to their circumstances; and
- an inconsistent distribution may automatically revoke the election.
Under the exposure draft, revocation could result in the trustee being taxed at the highest marginal rate plus Medicare levy in the year of revocation. The ordinary 30% minimum-tax regime would then apply in subsequent years.
Care will therefore be required before making what may effectively become a long-term and inflexible election.
What about capital gains?
The proposed election may also apply where a trust distributes a capital gain to its nominated bucket company. However, companies cannot access the 50% CGT discount or the proposed replacement CPI indexation concession.
This remains important because:
- the existing 50% discount will continue to apply to eligible gains accruing before 1 July 2027;
- individuals and trusts may receive CPI cost-base indexation for eligible gains accruing after that date;
- companies will generally be taxed on the full nominal capital gain; and
- the small-business CGT concessions are proposed to remain available where the relevant conditions are satisfied.
Accordingly, nominating a bucket company for 100% of distributions may be attractive for ordinary business and investment income, but it will not necessarily produce the best outcome for every capital gain.
What should clients do now?
No immediate action is required.
The exposure draft is not yet law, and further administrative and integrity provisions are expected. The final legislation may differ from the current proposal.
Before making an election, clients will need to consider:
- the ownership and tax rate of their bucket company;
- whether the company is an eligible nominated beneficiary;
- whether a 100% company nomination is appropriate;
- the loss of future distribution flexibility;
- the treatment of capital gains and franked dividends;
- existing unpaid present entitlements;
- Division 7A considerations; and
- the family’s longer-term succession and estate-planning objectives.
Quantiphy will continue monitoring the legislation and will provide further updates once the final rules are settled.
Clients who would like to discuss how the proposed changes may affect their family trust or bucket-company arrangements should contact their usual Quantiphy adviser.
This client alert provides general information only and should not be relied upon as taxation, legal or financial advice. The measures discussed are proposed legislation and may change before enactment.
