Labor's trust tax can hit 60 per cent on bucket companies. Here is who actually pays it

The number

Sixty per cent.

That is the rate Labor's proposed trust tax can reach when a discretionary trust pays income into a bucket company, according to the ABC's explainer published on 19 October. Critics of the government have been quoting the figure for weeks. Asked on Insiders whether it was real, Assistant Treasurer Daniel Mulino said only that "each situation is different".

The ABC's answer is shorter: yes, there are circumstances where the rate is 60 per cent. And the reason it gets there tells you more about your own structure than the headline does.

What changed

The government has proposed a 30 per cent minimum tax on income from discretionary trusts. Income can still be split between beneficiaries, but it is taxed at least 30 per cent from the first dollar, whoever receives it. A beneficiary on a higher marginal rate pays more.

For family members, a refund rule means the 30 per cent is paid once.

Bucket companies are treated differently. A bucket company is a company with no operations, set up to receive trust income, pay the 30 per cent company rate and hold the money until the family chooses to take it out as franked dividends. Under the proposal, trust income paid into a bucket company is taxed twice: the 30 per cent trust tax on the way in, then the 30 per cent company tax. No refund. The ABC reports the government has chosen not to extend the refund to bucket companies, specifically to discourage their use.

Thirty plus thirty. That is how 30 becomes 60.

There is an exit. Trustees can escape the minimum tax if they agree to give every beneficiary, people and bucket companies alike, the same share of income each year. Fixed shares, no annual reshuffle.

Why the government is doing it

The ABC quotes an estimate from ANU academics Bob Breunig and Tristram Sainsbury: with a trust and a bucket company, a person can avoid $150,000 of tax on $500,000 of income. The existing integrity provision for trusts has produced fewer than 10 litigated cases in more than 45 years, according to ANU tax law academic Sonali Walpola, who supports the change.

Business groups see it the other way. ACCI's Andrew McKellar calls it an assault on legitimate small businesses. CPA Australia's Jenny Wong says taxing twice on the way in goes well beyond closing a deferral advantage.

Both sides are arguing about family pharmacies and cafes. Nobody in the article is talking about property investors. That is the gap this piece is about.

What it means if you hold property through a trust

Many investors who own property in a discretionary trust were sold the structure on three promises: asset protection, flexibility, and the ability to stream rent and capital gains to whoever is on the lowest rate that year.

The proposal leaves asset protection alone. It takes aim at the third promise, and it aims hardest at the bucket company sitting at the end of the chain.

So the decision, for anyone with equity in a trust or planning to buy through one, now has three branches:

1. Keep distributing through the bucket company and accept that, if the proposal becomes law as described, residual trust income parked there could carry a 60 per cent rate rather than 30.
2. Move to equal fixed shares for every beneficiary every year, which the ABC says avoids the minimum tax, and give up the flexibility the trust was bought for.
3. Hold and watch. This is a proposal. It is not legislation. The details could change before anything passes.

The trade-off in plain numbers, using only the ABC's figures: the structure the ANU academics describe saves up to $150,000 on $500,000 of income today. Under the proposal, every dollar of that income carries at least 30 per cent tax before it reaches anyone, and a dollar sent to a bucket company carries 30 per cent again. The saving the structure was built for shrinks, and in the bucket company case it reverses.

The expensive mistake

Tearing down a property structure on the strength of a proposal is the expensive mistake. Moving a property out of a trust can trigger stamp duty and capital gains tax, and no future bill refunds either. Anyone who restructured on a headline, only to see the final law look different, paid real money to escape a rule that never arrived.

The second mistake is the one that got most people here: treating a trust as set and forget. A structure chosen in 2019 for a tax rule that existed in 2019 deserves a fresh look every time the rule moves. This is a structure problem, and structure problems are fixable, with your accountant and with time, without panic.

The part nobody puts in the headline

A 60 per cent rate on income only bites if there is income.

A property trust holding an asset that runs at a loss has nothing to distribute and nothing for a bucket company to receive. The tax rate on the wrapper matters far less than what the asset inside it is doing. Two streets in the same suburb can be having completely different outcomes: one producing rental growth and capital growth worth arguing about at tax time, the other producing holding costs and a vacancy sign.

That is where the attention should go. The right asset, on the right street, chosen on data, is what any structure wraps around. Get that wrong and no trust deed fixes it. Get it right and the tax question becomes a good problem to have, whichever way Canberra lands.

We do not sell property and we do not give tax advice. We test whether the asset earns its place in the portfolio, street by street, before anyone argues about the wrapper. Want to see how we test a decision like this before the structure is chosen? Join Jacob's free live webinar.