A trust can be a powerful structure for holding investments, running a business and planning for the future. But it is not a shortcut to lower tax, nor is it automatically the right structure for every family, investor or business owner.
The real question is whether a trust gives you more control, flexibility and protection than the structure you use now, while still being practical to manage. When it is designed properly and administered carefully, a trust can support long-term financial decisions. When it is set up casually or run without the right records, it can create avoidable tax, legal and administrative problems.
What a trust actually does
A trust is a legal relationship in which a trustee holds and manages property for the benefit of beneficiaries. The trustee may be an individual or a company, and the trust deed sets the rules for how the trust operates.
Unlike a company, a trust is not itself a separate legal person in the same way. The trustee is the party that enters contracts, owns trust assets in its capacity as trustee and carries out the trust’s responsibilities. If a company is appointed as trustee, that company must meet its own ongoing corporate obligations as well.
For many Australians, the most familiar type is a discretionary trust, sometimes called a family trust. It generally gives the trustee discretion to decide which eligible beneficiaries receive income or capital, subject to the terms of the deed.
This flexibility can make a trust useful for:
- families building an investment portfolio
- business owners wanting to separate business operations from personal ownership
- people planning how wealth may be managed across generations
- investors who want a structure capable of adapting as family circumstances change
- families with adult children, relatives or related entities who may become beneficiaries under the deed.
The deed is central. It determines who can benefit, who controls key decisions, how income and capital can be dealt with, and what happens if the trustee changes. A trust is only as flexible as its deed allows.
Tax flexibility can be valuable, but it is not automatic
One reason trusts are often considered is the ability to distribute trust income among eligible beneficiaries. This can create legitimate planning opportunities where beneficiaries have different financial circumstances, taxable income or cash needs.
However, the tax outcome is not determined simply by moving money between family members. Under the trust taxation rules, tax treatment depends on matters including the trust deed, the trustee’s resolutions, who is presently entitled to trust income and the nature of the income involved. Where trust income is not effectively dealt with, the trustee may be assessed instead.
That means a trust should not be viewed as having its own low tax rate. Rather, it can provide a framework for distributing income in a way that reflects the trust’s legal terms and the beneficiaries’ genuine entitlements.
A sound annual process usually involves:
- reviewing the trust deed and all amendments
- identifying the trust’s expected income, deductions, gains and franked distributions
- considering which beneficiaries are eligible and appropriate
- preparing trustee resolutions that match the deed
- recording entitlements accurately in the trust accounts
- ensuring beneficiaries receive the information needed for their own tax returns.
The timing and wording of trustee resolutions matter. For discretionary trusts, resolutions are commonly required before the end of the income year to establish a beneficiary’s entitlement to ordinary trust income. Different requirements can apply where the trust intends to deal specifically with capital gains or franked distributions.
In practical terms, good trust planning is an annual discipline, not an EOFY scramble.
A trust can support asset ownership and business planning
A trust can be used to hold investments, property, shares or a business. In some cases, it may also sit alongside a company structure, with each entity having a defined role.
For example, a family may use a discretionary trust to own a business or investment assets, while a company acts as trustee. The company is responsible for managing the trust’s affairs, but the assets are held by it in its trustee capacity rather than for the company’s own benefit.
This may offer advantages from an organisational and risk-management perspective. A corporate trustee can make it easier to distinguish trust assets and liabilities from assets held personally by the individuals involved. ASIC notes that a trust using a corporate trustee can have limited liability characteristics, although the actual protection available always depends on the facts, contracts and legal obligations involved.
It is important not to overstate this benefit. A trust does not make risk disappear.
Personal guarantees, poor record keeping, unpaid tax obligations, director duties, financing arrangements and actions outside the trustee’s authority can all affect the outcome. If business risk or asset protection is a key reason for establishing a trust, the structure should be considered with both accounting and legal advice.
A trust may also be less suitable where simplicity is the priority. A sole trader structure can be easier to start and manage. For some businesses, a company may be more appropriate. The right decision depends on profitability, risk, ownership plans, family circumstances, financing needs and the likely future direction of the business.
Trusts can make succession planning more deliberate
Many people establish a trust because they want to build and protect wealth for their family over time. A properly drafted and maintained trust can support that goal by separating the ownership and control of assets from the personal names of family members.
The key question is not just who receives income this year. It is also who will control the trust if the current decision-makers retire, lose capacity, separate from a partner or die.
Important roles may include:
- the trustee
- directors and shareholders of a corporate trustee
- the appointor or principal, where the deed includes that role
- guardians or protectors, if the deed provides for them
- default beneficiaries
- those authorised to remove or appoint a trustee.
These roles should align with your broader estate plan. A will alone may not control a trust in the way people expect, because the trust assets are generally held by the trustee rather than owned personally by an individual beneficiary.
A regular review is particularly important after major life events, such as marriage, separation, the birth of children, a death in the family, a business sale or a change in investment strategy. It is much easier to clarify control while everyone is available to make informed decisions than to resolve uncertainty later.
The compliance work is real, and it matters
A trust is not a set-and-forget structure. It requires ongoing administration, and that is part of the cost of receiving its potential benefits.
Depending on the trust’s activities, the trustee may need to maintain financial records, prepare annual accounts, lodge a trust tax return, manage BAS and GST obligations, provide distribution information to beneficiaries and keep formal trustee resolutions. The ATO expects trustees to retain the deed, amendments, resolutions and other records that explain how trust income has been dealt with.
Where the trustee is a company, there are also ASIC compliance responsibilities. Directors must keep appropriate records, act in the company’s interests and monitor the company’s financial position.
Trust losses can add another layer of complexity. Rules can restrict a trust’s ability to use prior-year tax losses or debt deductions where there has been a relevant change in control, ownership or distributions, or where an arrangement seeks to transfer a tax benefit to another party.
The takeaway is simple: a trust needs good governance. That means up-to-date records, timely resolutions and a clear separation between trust money, personal money and the finances of any related business or company.
Be careful with distributions, loans and family arrangements
Trust distributions must reflect real legal entitlements and be supported by the trust deed and trustee decisions. It is not enough to record a distribution to a beneficiary simply because the result appears tax-effective.
The ATO pays close attention to arrangements where a beneficiary is made entitled to trust income but another person ultimately receives the benefit. These arrangements may be affected by the reimbursement agreement rules, particularly where reducing tax is a purpose and the arrangement is not explained by ordinary family or commercial dealing.
This does not mean every family trust distribution is problematic. Families commonly share resources and meet joint household expenses. But the arrangement needs to be considered in its full context, documented properly and consistent with the beneficiary’s entitlement.
A common issue arises where trust income is distributed to an adult beneficiary but the funds remain in the trust, are used by another person or are lent to a related entity. These situations can be legitimate, but they need careful accounting treatment and advice before the transaction occurs.
If a trust is connected with a company, loans, unpaid entitlements and payments between the entities can also raise additional tax issues. These should be reviewed before year end rather than reconstructed after accounts are prepared.
A practical scenario
Consider a couple who operate a growing consulting business as sole traders. They have begun investing surplus cash, their profits vary from year to year and they expect their adult children may eventually become involved in the business.
A discretionary trust with a corporate trustee may be worth exploring. It could provide a structure for operating the business or holding selected investments, allow the family to consider distributions among eligible adult beneficiaries when appropriate, and create a clearer framework for future control and succession.
However, the structure would only be worthwhile if the family is prepared to maintain it properly. They would need a suitable deed, a clear plan for the trustee company, annual resolutions, accurate accounts and advice on how cash is to move between the trust, the business and family members.
The best outcome is not necessarily the most complicated structure. It is the structure that fits the family’s current needs and can be administered well as those needs change.
Is a trust likely to be the right move for you?
Setting up a trust may be worth considering if you have growing business income, investment assets, a family wealth strategy or a genuine need for greater flexibility and longer-term planning.
It may be less appropriate if your affairs are simple, the expected benefits are small compared with the setup and annual costs, or you do not want the additional record-keeping responsibilities. A trust should be established because it serves a clear commercial, family or investment purpose, not because it is presented as a universal tax solution.
The key is to look beyond the initial setup. Consider how the trust will operate each year, who will control it, how money will flow, which beneficiaries may receive distributions and how it fits with your broader business, tax and estate plans.
This article is general information only and is not personal financial or tax advice. Trusts can have significant legal and tax consequences, so speak with a registered tax agent or accountant, such as, about your specific circumstances before establishing or changing a structure.