Taxpayers receiving trust income through ‘bucket’ companies could wind up paying tax rates of 60%, according to early analysis of the trust crackdown contained in recent federal budget papers.
The prospect has spooked leading accountants, who say taxpayers could face extra cost and complexity if they are forced to abandon long-held business structures.
The 2026-27 federal budget included a new baseline 30% tax on discretionary trust income, applied at the trustee level.
This removes the incentive to ‘split’ large amounts of income between trust beneficiaries, to take advantage of their lower personal income tax rates and reduce the overall tax take.
Under the budget proposal, individual beneficiaries will receive non-refundable tax credits, recognising the 30% tax already paid at the trustee level.
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But no such credits will apply to corporate beneficiaries.
This means so-called ‘bucket’ companies will be taxed on income that was already clipped at the trust level.
“At the best we can understand at the moment, it’s getting doubly taxed,” said Lisa Greig, a tax expert and principal at Perigee Advisers.
How the trust reforms could lead to effective tax rates as high as 60%
The budget papers do not detail precisely how that tax reform will work, with further detail expected in the government’s draft legislation.
But in one simplified scenario, $100 of income could be taxed at 30% at the trust level, with the remaining $70 flowing to a bucket company.
If that ‘bucket’ company was a base rate entity, it would pay 25% tax on that $70.
That would result in $47.50 in tax paid on the original $100 in income, or an effective tax rate of 47.5%, surpassing the top personal income tax rate of 47% (including the Medicare levy).
Other interpretations of the budget papers result in even higher tax rates.
An explanatory document states corporate beneficiaries will be assessed “based on the trust income to which they are entitled”.
If both the trust and corporate beneficiary are taxed on the original $100 — the trust income to which a bucket company is entitled — that would result in effective tax rate of between 55%-60%, depending on whether the bucket company counts as a base rate entity.
The prospect of effective tax rates far exceeding the top marginal tax rate has rattled the accounting sector, said Natalie Lennon, founder of Two Sides Accounting.
“When they announced it, accountants were messaging each other in private messages, saying, ‘Did we hear that right? Surely that can’t be right, because it just seems very unfair. That’s higher than the top marginal rate.’”
Support for “zero to hero” small businesses
Budget papers say the reforms will more closely align tax on trust income with wages, making the tax system fairer for working Australians without the opportunity to ‘split’ income through complex accounting structures.
But accountants say not not all ‘bucket’ companies are created with the sole goal of reducing tax obligations.
Those structures can help small businesses facing “lumpy” income smooth out their income, says Greig.
“Our progressive tax system doesn’t work too well if your income isn’t stable,” she said.
“That’s why it works beautifully for salary and wage earners, but it doesn’t work very well for any entrepreneurial spirit.
“We can go from zero to hero to zero, year-on-year. And that’s why we use bucket companies to average the income across four years, for example.”
Other small business owners may use ‘bucket’ companies as “asset protection vehicles”, isolating those funds from events damaging the business itself, said Lennon.
Also unclear in the budget papers is any “rollover” support for small businesses leaving trust structures and incorporating instead.
While the federal government is pledging support, accountants also fear restructuring entities holding property could result in large stamp duty bills, which are a state government responsibility.
“We don’t really know what’s going to happen there,” said Lennon.
Trust consultation on the way
The discretionary trust reforms are slated to take effect from July 1, 2028, with the government choosing to prioritise the passage of legislation for its capital gains tax and negative gearing amendments first.
“Key aspects of the changes will be finalised following consultation with stakeholders,” according to the budget papers.
“It’s a bit late for that” kind of consultation, says Lennon.
“You’ve upset everybody in the country, you’ve made accountants stressed, because we’re going to have a whole lot of extra work.
“Even explaining it to clients… it’s so complicated now to unravel all these things.”
“I’m not convinced they have the appetite to actually hear those grievances, or any feedback” through the planned consultation, adds Greig.
This article first appeared on SmartCompany.
