Your Business Structure May Be Obsolete
For the last 20 years, the classic SME structure in Australia relied on discretionary trusts, family distributions, and surplus profits pushed into a bucket company with tax capped at 25% or 30%. The Budget does not specifically abolish this strategy. But it may fundamentally change whether it still works.
It has been one of the most commonly used structures in Australian business.
And for many SMEs, the biggest issue is not the discretionary trust itself. It is the potential destruction of the economics behind bucket companies.
Why Bucket Companies Became So Popular
Bucket companies solved several major problems for business owners. They allowed:
- profits to be capped at corporate tax rates;
- cash to remain inside the broader group;
- reinvestment without immediate top-up personal tax;
- flexibility around timing of dividend extraction;
- asset accumulation outside trading entities.
In simple terms, they became a pressure valve for excess trust income. Historically, that strategy worked extremely well.
What the Proposed Trust Rules Change
Under the proposed rules from 1 July 2028:
- discretionary trusts pay a minimum 30% tax;
- non-corporate beneficiaries receive a non-refundable tax credit;
- corporate beneficiaries do NOT receive the credit.
That final point is the major issue. Because under the proposal the trust will pay tax first, and the company will then pay tax again.
Why This Creates a Double Tax Problem
Existing Position
| Step | Outcome |
|---|---|
| Trust distributes $100k to bucket company | Company taxed at 25% |
| Tax paid | $25,000 |
| Remaining retained profits | $75,000 |
Simple. Efficient. Predictable.
Proposed Position
Assume: trust earns $100,000, distributes to company beneficiary.
| Step | Amount |
|---|---|
| Trust minimum tax @30% | $30,000 |
| Company includes income | $100,000 |
| Company tax @25% | $25,000 |
| Credit available to company | Nil |
| Combined tax before dividends | $55,000 |
And that is BEFORE dividends are paid, shareholders pay top-up tax, or Division 7A extraction occurs.
Why This Matters So Much for SMEs
Thousands of SME groups currently rely on discretionary trusts, bucket companies, retained earnings strategies, and inter-entity lending.
Many structures have:
- significant retained earnings;
- Division 7A loans;
- unpaid present entitlements (UPEs);
- intercompany loan arrangements;
- and legacy tax planning strategies.
Business owners using bucket companies and related trust structures should also be aware of the ATO’s ongoing focus on private company benefits (including Division 7A), particularly where profits are extracted or retained in ways that may produce unintended tax consequences.
If the economics of bucket companies materially deteriorate, those structures will need complete review.
Does This Mean Bucket Companies Are Dead?
Not necessarily. But their purpose may fundamentally change.
Historically, bucket companies were often used primarily for tax deferral and tax minimisation.
Going forward, structures may need to focus more heavily on:
- asset protection;
- succession;
- business separation;
- governance;
- and long-term ownership strategy.
The trust itself may still remain extremely valuable. But the way profits flow through the structure may need to change materially.
Why Simply "Moving to a Company" Is Dangerous Advice
This is where many business owners may overreact. The answer is NOT everyone should move into companies immediately.
Because changing structures creates other major issues including:
- Division 7A consequences;
- loss of flexibility;
- loss of streaming;
- succession limitations;
- asset protection risks;
- payroll tax grouping;
- landholder duty;
- CGT rollover complexity;
- financing and banking implications;
- and potential loss of Small Business CGT concessions.
Some businesses may ultimately decide the operating business should sit in a company, while trusts continue to hold ownership interests or passive assets. Others may keep the trust but fundamentally alter distribution strategy.
The correct answer depends entirely on profitability, family circumstances, future exit plans, retained earnings requirements, and succession objectives.
Why Structure Reviews Now Become Critical
The biggest risk for SME groups is not necessarily the new tax itself. The biggest risk is being trapped inside a structure that was built for yesterday’s tax rules.
Many structures currently in place were designed around lower corporate tax arbitrage, trust income splitting, bucket company retention strategies, and long-term tax deferral. If those advantages materially reduce, the structure itself may no longer align with the commercial objectives of the business.
Structure Review Action List
Every SME group using discretionary trusts and bucket companies should now review:
EXISTING STRUCTURE
- Discretionary trusts
- Corporate beneficiaries
- Fixed trusts
- Investment entities
- Holding entities
BUCKET COMPANY EXPOSURE
- Historical distributions
- Retained earnings
- Future profit retention strategy
- Expected tax leakage
- Dividend extraction plans
DIVISION 7A & UPES
- Unpaid present entitlements
- Complying loan agreements
- Minimum yearly repayments
- Inter-entity lending arrangements
CGT & SUCCESSION
- Access to Small Business CGT concessions
- Active asset eligibility
- Ownership of goodwill
- Land ownership
- Future sale strategy
- Succession planning
ASSET PROTECTION
- Trading risk exposure
- Asset separation
- Protection of accumulated wealth
- Director/shareholder risk
COMMERCIAL CONSIDERATIONS
- Banking facilities
- Financing covenants
- Payroll tax grouping
- Land tax exposure
- State duty implications
The Most Important Point
The proposed reforms do NOT mean: “Trusts are dead.”
But they may mean: “The traditional trust and bucket company strategy no longer achieves what it was originally designed to do.”
That is a very different conversation.
For many SMEs, the next 12 to 18 months may become the most important structure review period they have ever undertaken.
Questions Every SME Owner Should Be Asking Now
- Do we rely on bucket company distributions?
- What is our current Division 7A and UPE exposure?
- How much tax leakage occurs under the proposed double-tax position?
- Does our structure still make commercial sense?
- Should our operating business sit in a company instead?
- What happens to our retained earnings strategy?
- Are we at risk of being trapped in a structure built for yesterday’s rules?
- Do we need a complete structure review before 30 June 2027?
Take the next step
Not sure if your structure still works?
Book a free clarity call with our team. We will look at your structure, walk through your specific risks, and give you a clear picture of what needs reviewing before 30 June 2027.