Trusts are everywhere in Australian investing. Family trusts, discretionary trusts, bare trusts, superannuation trusts if you have spoken to an accountant or a property advisor for more than five minutes, the word “trust” has probably come up. But here is the question most people never ask: is a trust actually a tax-saving structure? The honest […]
Trusts are everywhere in Australian investing. Family trusts, discretionary trusts, bare trusts, superannuation trusts if you have spoken to an accountant or a property advisor for more than five minutes, the word “trust” has probably come up.
But here is the question most people never ask: is a trust actually a tax-saving structure?
The honest answer is: not automatically. The tax outcome depends on the type of trust, the income it earns, who receives the distribution, what the trust deed says and whether the whole arrangement stands up under Australia’s anti-avoidance and integrity rules.
For property investors and business owners, four areas deserve your attention before you commit to any structure:
- How tax on trust distributions actually works
- The bucket company — what it can do and what it can’t
- How owning property through a trust changes your land tax
- Why an SMSF plays by completely different rules
1. How is a trust taxed in Australia?
First things first: a trust is not taxed like a company.
Instead, the trustee works out the trust’s net income for tax purposes each year, works out which beneficiaries are presently entitled to that income and the tax is then assessed to the beneficiaries — not the trust.
This is what gives a discretionary family trust its flexibility. Income can be split between adult beneficiaries on different tax rates. A beneficiary on a low marginal rate gets taxed on their share at that low rate. That is the whole point of the structure.
But — and this is a big but — a distribution must be properly authorised under the trust deed and correctly recorded in a trustee resolution, before 30 June. A trust distribution is not just moving money between bank accounts. Get the paperwork wrong and the ATO can tax the trustee at the top marginal rate instead.
Capital gains get their own treatment too. Where the requirements are met and the deed allows it, capital gains can be specifically streamed to the beneficiaries who will make the best use of the 50% CGT discount.
How a family trust is taxed
2. What is a bucket company?
You have probably heard the term at a BBQ. A bucket company is simply a private company set up to receive distributions from a family or discretionary trust.
Here is the basic idea. Say your family trust earns $300,000 of taxable income this year.
Option A: distribute it all to one individual who is already earning well. That income stacks on top and gets taxed at up to 47 cents in the dollar.
Option B: distribute some of it to a corporate beneficiary — the bucket company. An eligible base rate entity pays company tax at 25%. The income is “parked” in the company instead of landing in a family member’s personal return.
That is where the name comes from. The company acts like a bucket: income goes in, gets taxed at the company rate and stays there until you decide what to do with it.
Sounds great, right? Well, not so fast.
The bucket company explained
3. The 25% trap: the tax isn’t finished
This is the misconception we hear most often:
“I distributed the trust income to my bucket company, paid 25% tax and now the money is mine.”
No. It isn’t.
The company is a separate taxpayer. The money inside it belongs to the company and getting it out to shareholders or their associates has its own tax consequences. This is where Division 7A comes in — the rules that stop private company profits leaking out to shareholders tax-free, whether as loans, payments or forgiven debts.
And then there is the UPE — the unpaid present entitlement. Say the trust distributes $200,000 to the bucket company but the cash never actually leaves the trust’s bank account. The company is entitled to the money, but it is still sitting in the trust. That unpaid entitlement is a UPE and it has been one of the most litigated and ATO-scrutinised areas of trust tax for years. Old advice about simply leaving the company’s money in the trust should not be relied on anymore.
So treat a bucket company for what it is: one piece of a bigger machine. Before you use one, your advisor needs to look at the whole picture — the trust deed, trustee resolutions, company tax, Division 7A, UPEs, franking credits, cash flow, how the profits will eventually come out and section 100A (more on that below). If any one of those pieces is ignored, the 25% “saving” can evaporate fast.
4. Section 100A: the other trap for trust distributions
Section 100A of the Income Tax Assessment Act 1936 is the integrity rule that catches people out.
In plain English: if a trust distribution is made to one beneficiary, but the real economic benefit ends up with someone else under a reimbursement agreement, the ATO can tax the trustee at the top rate instead.
Think of the classic example: income is distributed to an adult child on a low tax rate, but the child effectively passes the money back to mum and dad. That is exactly the arrangement section 100A was designed to catch and the ATO has published extensive guidance on how it will apply it.
The lesson: distribution planning is not just about who is legally entitled to the income. It is about who actually receives the benefit and why the arrangement was entered into. If the only reason for a distribution is to save tax, that is a red flag.
5. Trusts and land tax: the state tax nobody budgets for
Income tax is only half the story. If a trust owns Australian real property, land tax can become the bigger number — and it catches investors by surprise every year.
Why? Because land tax is a state tax, not a Commonwealth tax. Every state and territory has its own rules, thresholds and rates. What works in NSW might be completely wrong in Victoria or Queensland.
NSW land tax and trusts
For the 2026 land tax year, Revenue NSW has set the general threshold at $1,075,000 and the premium threshold at $6,571,000. Both have been frozen for land tax years after 2024.
Here is the part most property investors miss: the general threshold does not apply to every trust.
Revenue NSW is blunt about this — the tax-free threshold does not apply to land held in special or discretionary trusts. Land tax is calculated from the first dollar.
That can change the numbers dramatically. Revenue NSW’s own example has a special trust holding NSW land valued at $600,000 — comfortably under the individual threshold — and still paying land tax on the entire $600,000. An individual owning that same property would pay nothing.
Why this matters before you buy
Say you own an investment property personally and the land value sits under the threshold. No land tax. Now transfer that property into your discretionary trust — and the treatment can change completely, because the trust is assessed as a special trust.
This is why the ownership structure needs to be settled before you sign the contract. Restructuring afterwards means transfer duty, potential CGT and transaction costs. Do the analysis first, not after.
Does a bucket company give you another threshold?
Short answer: no.
Adding a bucket company to your family trust does not magic up an extra $1.075 million land tax threshold. Land tax depends on the legal ownership structure and the type of entity under the relevant state law and Revenue NSW treats individuals, companies, trusts, bare trusts and superannuation trusts differently.
Never set up an extra entity on the assumption that each one gives you another threshold. That assumption is wrong and it can be an expensive mistake.
What about a bare trust?
A bare trust is different again. Revenue NSW treats a bare trust as a type of fixed trust and bare trusts can receive the land tax threshold — provided the requirements are met and a copy of the bare trust deed is provided.
That distinction matters a lot where a bare trust is being used for a specific investment or financing structure. Just do not confuse a bare trust with a discretionary family trust. They look similar from the outside, but legally and for tax they are very different animals.
NSW land tax threshold by structure
6. SMSFs and land tax — same threshold, different game
Now for the good news for SMSF trustees: Revenue NSW specifically gives a complying superannuation trust the land tax threshold. So on land tax alone, an SMSF sits closer to individual ownership than to a discretionary trust.
But that does not mean property should automatically go into your SMSF.
An SMSF is a trust governed by superannuation law and it cannot be used as just another family investment vehicle. The SIS Act, the sole purpose test, the investment strategy rules and the related-party rules all apply.
The rules in plain terms:
- Residential property bought by an SMSF generally cannot be lived in or rented by a member or their relatives. No exceptions because “they pay market rent”.
- Commercial property has more flexibility business real property can be leased to a related party on an arm’s-length basis but the rules still have to be satisfied, documented and valued properly.
- The tax perks are real: a complying SMSF gets a one-third CGT discount on assets held over 12 months (15% less one-third = an effective 10% rate) and once a member is in retirement phase, qualifying income can be completely tax-free under the ECPI exemption.
Different rules, different game. An SMSF can be a powerful property structure — but only when the investment genuinely fits the superannuation rules.
7. A simple comparison
| Structure | Income tax | NSW land tax | Main issue to watch |
| Individual | Marginal tax rates | General threshold applies | Taxed at personal rates |
| Family/discretionary trust | Assessed to beneficiaries or trustee | Special trusts get no threshold | Distributions + land tax |
| Trust + bucket company | Company rate (25% if eligible) | No automatic extra threshold | Division 7A, UPEs, extraction |
| Bare trust | Depends on underlying arrangement | Threshold available if requirements met | Correct deed and documentation |
| SMSF | Concessional super tax (15%, 10% CGT) | Complying funds get the threshold | SIS rules and investment restrictions |
8. The key point: structure before you buy
If you take one thing away from this article, make it this: tax planning happens before you buy the asset, not after.
A structure that looks great for income tax can be a disaster for land tax. A structure that saves land tax can create problems with asset protection, financing, CGT, distributions or superannuation law. It is never one number on a page.
The wrong question is: “which structure pays the least tax?”
The right question is: “which structure works for the whole life of this investment?”
That means weighing up twelve things before you sign anything:
- Acquisition costs
- Stamp duty
- Land tax
- Income tax
- Capital gains tax
- Asset protection
- Financing
- Trust distribution flexibility
- Division 7A
- Estate planning
- Superannuation rules
- Exit strategy
Structure before you buy
The bottom line
Trusts give Australian investors and business owners real flexibility. Used properly, a family trust plus a bucket company can legitimately smooth out the tax paid across a family group. But none of it is set-and-forget. Division 7A, UPEs, section 100A and the eventual extraction of company profits all need to be part of the plan from day one not surprises discovered years later.
For property investors, land tax deserves the same respect as income tax. In NSW, the type of trust you use can decide whether the $1,075,000 threshold exists at all. And for SMSF trustees: your fund gets the threshold, but the superannuation rules are strict for a reason. The structure only works when the investment genuinely belongs in super. Structure first. Buy second. Your future self will thank you.
General information only. Tax, superannuation and state tax laws are complex and change regularly. The right structure depends on your circumstances, the trust deed, the asset, the state or territory involved and what you intend to do with the investment. Always obtain professional tax, legal and financial advice before establishing or changing a structure.
