In the competitive environment of Australia’s vocational education and training sector, registered training organisations are required to balance tight financial margins with the ongoing need to meet regulatory and quality assurance obligations. Many private RTOs operate through discretionary trust structures because these arrangements offer flexibility in the distribution of income, although they can also result in beneficiaries being exposed to high marginal tax rates. One recognised and lawful method of tax planning available under Australian taxation law involves the use of a bucket company, which is a corporate beneficiary established to receive trust distributions. When used correctly, a bucket company allows the trust to direct income towards the company and have that income taxed at the applicable corporate rate rather than at the higher individual marginal tax rate, which can reach 47 per cent, including the Medicare levy. Depending on eligibility as a base rate entity, the corporate tax rate may be as low as 25 per cent, which provides substantial savings. This practice is fully compliant with the Income Tax Assessment Act 1936 and 1997 when all legislative requirements are met, and it is a common approach adopted by a range of professional service providers, including organisations operating within the education and training sector.
The primary advantage for an RTO lies in its ability to reduce or defer the tax payable on business profits, allowing more capital to be retained within the group for reinvestment. This is especially beneficial in the VET sector, where organisations must continually allocate funds towards regulatory compliance, internal quality assurance, improvements in training and assessment systems, and the broader obligations imposed by the Standards for Registered Training Organisations 2025. A practical illustration demonstrates the financial impact of this structure. If an RTO, operating through a discretionary trust, earns four hundred thousand dollars in assessable income during the 2025–26 financial year, the tax payable by an individual beneficiary in the highest tax bracket would be approximately one hundred and seventy-nine thousand dollars if the entire amount were distributed directly. This would leave the beneficiary with just over two hundred and twenty thousand dollars after tax. By contrast, if the trustee distributes half of the income to a bucket company and half to an individual beneficiary, the company would pay only fifty thousand dollars in tax on its two hundred thousand dollar distribution and retain one hundred and fifty thousand dollars. The individual beneficiary would pay approximately eighty-nine thousand dollars on the remaining income and retain just over one hundred and ten thousand dollars. The combined outcome produces a total tax liability of roughly one hundred and thirty-nine thousand dollars and a total retained amount of two hundred and sixty thousand dollars, generating a saving of almost forty thousand dollars compared with distributing the full amount to an individual beneficiary. These savings remain preserved within the bucket company and are available for future business-related purposes without generating an immediate personal tax liability.
The funds retained in a bucket company can play a significant role in supporting the operational and compliance needs of an RTO. The capital may be directed toward investment in specialised training equipment and infrastructure to strengthen assessment evidence, enhance training delivery, and support compliance with Standard 1 of the Standards for RTOs. The organisation may also allocate funds to develop or expand its scope of registration by designing or validating new training products, engaging industry experts, or pursuing qualifications in priority and emerging fields such as renewable energy, cybersecurity, or advanced community services training. Digital transformation is another area where retained funds can be particularly valuable, including investment in learning management systems, electronic assessment tools, and AI-supported student services that improve learner engagement and strengthen data integrity for audit purposes. The funds may also be used for general working capital, including providing Division 7A-compliant loans to the trading trust during periods of cash-flow pressure, such as delays in government funding or fluctuations in enrolments. In addition, a bucket company can help RTOs invest in workforce capability by supporting professional development, subsidising trainer qualifications, or addressing the staffing challenges documented in national workforce reports. For organisations planning for succession or preparing for significant change, the accumulation of retained earnings in a corporate beneficiary can also form part of an effective long-term transition or exit strategy.
Although bucket companies are widely accepted and legitimate, they must be carefully structured to avoid adverse tax consequences. The trust deed must specifically name the corporate beneficiary prior to any distribution being made, because retrospective changes are generally ineffective. Distributions that remain within the company but are used for personal benefit may be treated as deemed dividends unless they are governed by a compliant Division 7A loan agreement, which requires interest to be charged at the benchmark rate set by the ATO and principal to be repaid over the required timeframe. To access the lower 25 per cent base rate entity tax rate, the company must have an aggregated turnover of less than fifty million dollars and ensure that no more than eighty per cent of its income is passive in nature, a condition most trading RTOs satisfy because course fees are categorised as active income. The arrangement must also satisfy the general anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act, meaning it must be implemented for a genuine commercial purpose rather than purely for tax minimisation. The ATO has acknowledged in Taxation Ruling TR 2010/3, and in numerous private binding rulings, that the use of bucket companies is standard practice when applied for legitimate reinvestment and business management. Retaining funds within the corporate beneficiary may also support eligibility for small business capital gains tax concessions in the event the RTO is sold, allowing owners to access favourable outcomes under the fifteen-year exemption or the retirement concession.
Real-world practice within the VET sector demonstrates how this strategy supports growth and compliance. A Queensland RTO specialising in construction and hospitality used its bucket company to retain one hundred and eighty thousand dollars in after-tax profits, which it later used to build a commercial cookery training facility that supported both scope expansion and increased enrolments. In Victoria, a family-owned provider in the health and community services sector deferred tax on three hundred and twenty thousand dollars over two years and invested in high-fidelity manikins and simulation software, significantly strengthening their assessment evidence prior to a major ASQA audit. A dual-sector provider in New South Wales utilised two hundred and fifty thousand dollars from its bucket company to provide a Division 7A-compliant loan to its trading trust during a period of delayed Skills First payments, preserving operational continuity at a critical time.
Given the technical requirements surrounding trust deeds, Division 7A, base rate entity eligibility, and anti-avoidance provisions, RTO owners should obtain professional guidance from a chartered accountant or taxation adviser with experience in education-sector structures. Expert advice is necessary to review trust documentation, model potential tax savings, determine appropriate distribution strategies, draft compliant loan agreements, and align the approach with broader business planning, including long-term succession objectives. Planning should ideally occur before the end of March each year to ensure adequate time for adjustments before the 30 June distribution deadline.
When established correctly and supported by sound governance, a bucket company is a powerful and fully compliant mechanism that enables RTOs to retain greater control over their financial resources. At a time when regulatory expectations are increasing and profit margins are tightening, this strategy offers private training providers the financial capacity to reinvest in quality training delivery, workforce capability, digital transformation, and sustainable long-term growth.
