There’s a Hole in My Bucket…The Budget’s Minimum Tax on Discretionary Trusts and Bucket Companies

A bucket company is a company that is incorporated to act as a beneficiary of a discretionary trust. The company receives distributions from the trust and enables the distributions to be taxed at the corporate tax rate, rather than potentially being taxed at higher individual marginal tax rates.

Commencing from 1 July 2028, it is proposed that trustees of discretionary trusts will be required to pay a 30% minimum tax on the taxable income of discretionary trusts (Minimum Tax). Under the current proposed legislation, an individual beneficiary receiving a trust distribution will receive a non-refundable credit for the 30% tax paid by the trustee (Credit).

Early industry discussions suggests that the effective tax rate on trust income distributed to a ‘bucket company’ will be subject to double tax, as the Credit system won’t apply to corporate beneficiaries.

Treasury’s fact sheet of the 2026 Federal Budget (Fact Sheet) confirms that corporate beneficiaries (i.e. bucket companies) will be assessed on the trust income to which they are entitled, without being able to claim the Credit. The purpose appears to ensure the Minimum Tax cannot be avoided by cycling income though a bucket company.

The Fact Sheet & the Consequence

The Fact Sheet suggests that a corporate beneficiary will be assessed on its entire entitlement, not just assessed on income after the Minimum Tax reduces the income that flows through to a corporate beneficiary. However, different circumstances will cause different outcomes.

For example, Sam established a discretionary trust called the Long Walk Family Trust (Trust). In the 2029/30 financial year, the Trust earns $1 million of taxable income. The trustee of the Trust, Rosie (Trustee), distributes the entirety of the income to S.WISE PTY LTD, a bucket company (Company).

The Minimum Tax will be payable by the Trustee, and the Company will not be entitled to any Credit (Reduced Income). The Company will then pay tax on the distribution from the Trust at the relevant corporate tax rate and will not benefit from any Credit.

According to the Fact Sheet, the Company may be taxed on the full $1 million, not the Reduced Income. This will significantly impact the dividend payable to Sam, regardless of the Credit being available to Sam. After assessing Sam’s Credit, assessable income, Medicare levy and top up tax, the effective tax rate approaches 70%.

In other circumstances, the Company may pay tax on the balance of the Trust’s 30% tax which could produce an effective tax rate of approximately 51%.

Key Takeaways

The Budget’s Minimum Tax is imposed on the trustee and is calculated by reference to the taxable income of the trust, the trustee’s distribution of that income and beneficiary entitlements.

Corporate beneficiaries will not receive any Credit for the Minimum Tax paid at the trustee-level. Corporate beneficiaries may remain assessable for the full amount of their entitlement. Where bucket companies are involved, double tax is payable.

The budget and proposed legislation raise questions about the interaction between trust law and tax law. Particularly, in relation to unpaid present entitlements. For trustees, company directors, professional advisors, and beneficiaries, it is important to consider these issues to confirm the tax position.

For more information, please contact:

Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal

Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal

Tayla Berger
Senior Associate
T: 03 5226 8559 | M: 0407 825 365
E: tberger@ha.legal

This article was prepared with the assistance of Philippa Duniam, Law Clerk.