What Is a Family Trust in Australia?
A family trust is a discretionary trust where the trustee has complete discretion each year over how to distribute the trust’s income among a defined group of beneficiaries (typically family members). The key word is “discretionary”: the trustee is not obliged to distribute income equally or in the same way every year. This flexibility is the central advantage of the structure.
The legal parties in a family trust are:
- The settlor — the person who establishes the trust (usually contributes a nominal sum like $10 to bring the trust into existence)
- The trustee — the person or company that holds the assets and manages the trust, makes distribution decisions, and is legally responsible for the trust’s obligations
- The beneficiaries — the individuals (and sometimes companies or trusts) who can receive income or capital distributions from the trust
- The appointor — the person with the power to replace the trustee (effectively the most powerful position in the structure)
A trust is not a separate legal entity in the same way a company is. The trustee holds assets legally on behalf of the beneficiaries. The trust deed (the legal document establishing the trust) sets out the rules under which the trust operates.
How Does a Family Trust Work in Australia?
Each financial year, the trust earns income (from a business, investments, or rental properties). Before 30 June, the trustee makes a formal resolution deciding which beneficiaries receive what share of that income. Each beneficiary then pays tax on their distribution at their own personal marginal tax rate.
The power in this structure is that the trustee can direct income to the family members in the lowest tax brackets each year. A spouse with little other income, adult children who are studying, or even a company owned by the trust can be beneficiaries, each taxed at their own rate.
Example: A family trust earns $200,000 of business income in FY2026. Rather than one person paying tax at 45% on the income above $190,000, the trustee distributes $80,000 to the business owner, $60,000 to their spouse, and $60,000 to a bucket company (taxed at 25%). The overall tax outcome is significantly lower than if the same income had been earned personally.
Benefits of a Family Trust in Australia
Income Splitting
The primary benefit. By distributing income to beneficiaries in lower tax brackets, the family unit pays less tax overall. This is the most powerful income-splitting tool available under Australian tax law for family businesses.
Asset Protection
Assets held inside a trust are not owned personally by the trustee or the beneficiaries. If the business owner faces personal creditor claims or litigation, assets in a properly structured trust are generally protected. The key word is “properly structured”: last-minute transfers to trusts to avoid creditors can be challenged as uncommercial transactions.
CGT Discount Available to Individual Beneficiaries
Unlike a company, a discretionary trust can pass the 50% CGT discount through to individual beneficiaries when an asset held for more than 12 months is sold. This makes the trust structure significantly more tax-effective than a company when it comes to capital gains. Read our guide on Capital Gains Tax for Small Business in Australia for how the concessions interact with trust structures.
Estate Planning Flexibility
Trust assets do not form part of a deceased estate in the same way personally-owned assets do. The appointor role can be passed on, giving the family control over who manages the trust after the original trustee passes away. This can be valuable in blended families or complex succession situations.
Disadvantages of a Family Trust
- Cannot retain profits. Unlike a company, a discretionary trust must distribute all its income to beneficiaries each year. Undistributed income is taxed at the top marginal rate of 45%. This makes trusts less suitable for businesses that want to reinvest earnings.
- Losses cannot be passed to beneficiaries. If the trust makes a loss, that loss stays inside the trust and can only be used to offset future trust income. It cannot be distributed to beneficiaries to offset their personal income.
- Increased ATO scrutiny. The ATO actively monitors trust distributions, particularly under Tax Avoidance Law (section 100A), which can apply where distributions are made to low-tax beneficiaries who effectively return the money to the controller. Trust distributions must be genuine and commercially reasonable.
- More complex and expensive to administer. A trust requires a properly drafted trust deed, annual financial statements, tax returns, and annual distribution resolutions. The cost of maintaining a trust is typically higher than a sole trader structure.
For a side-by-side comparison of all four business structures, read our guide on Sole Trader vs Company vs Trust.
How to Set Up a Family Trust in Australia
Step 1: Decide on your trustee structure
You can use an individual trustee (yourself or a family member) or a corporate trustee (a company acts as trustee). A corporate trustee is strongly recommended because it provides continuity when members change, cleaner separation of personal and trust assets, and stronger asset protection. The corporate trustee setup adds approximately $500 to $1,000 to setup costs but is worth it for any significant trust.
Step 2: Prepare the trust deed
The trust deed is the foundational legal document that defines who the beneficiaries are, the trustee’s powers, the appointor role, and the rules for distribution. It must be drafted by a qualified professional and stamped in the relevant state. A poorly drafted deed can create significant problems later. Cost: $1,000 to $2,000.
Step 3: Register the trust with the ATO
The trust needs its own Tax File Number (TFN) and usually an Australian Business Number (ABN) if it is conducting a business. These are applied for through the ATO after the deed is signed and stamped.
Step 4: Open a trust bank account
The trust must have its own bank account in the name of the trustee as trustee for the trust. Trust funds must never be mixed with personal funds.
Step 5: Set up trust accounting
The trust needs its own set of financial records, separate from any personal or business accounts. Our Bookkeeping, Reporting and Payroll service can configure Xero or MYOB correctly for trust accounting from the start.
How Much Does It Cost to Set Up a Family Trust in Australia?
| Item | Typical Cost |
|---|---|
| Trust deed preparation | $500 to $1,500 |
| Corporate trustee company registration (recommended) | $500 to $1,000 |
| Stamp duty on trust deed (varies by state) | $0 to $500 |
| ATO registration (TFN, ABN) | Included via accountant |
| Total setup cost | $1,500 to $3,000 |
Annual running costs (trust tax return, financial statements, distribution resolutions) are typically $1,500 to $3,000 per year on top of setup. Our Business Advisory team can advise whether the tax savings justify the establishment and running costs for your specific situation.
The 30 June Distribution Deadline: The Most Critical Annual Obligation
Every year without exception, the trustee of a discretionary trust must make a formal written resolution before 30 June deciding how to distribute the trust’s income for that financial year. If no resolution is made before 30 June, the income is taxed at the top marginal rate of 45% — the default rate that applies when no distribution is made. There are no extensions and no exceptions.
The distribution resolution is the most time-sensitive annual obligation for any trust. If you operate via a trust and are uncertain whether this has been done, contact our Taxation and Accounting team well before 30 June. For a full EOFY checklist covering trusts and all other key tax deadlines, read our EOFY Tax Planning Checklist for Small Business.
Frequently Asked Questions
What is a family trust in Australia? A family trust is a discretionary trust where the trustee has full discretion each year to distribute income among a defined group of beneficiaries (typically family members). It is used for income splitting, asset protection, and estate planning.
How do you set up a family trust in Australia? You need a properly drafted trust deed prepared by a qualified professional, a trustee (individual or corporate), a TFN and ABN registered with the ATO, and a dedicated trust bank account. Professional setup typically costs $1,500 to $3,000.
What are the benefits of a family trust? Income splitting among family members in lower tax brackets, asset protection from personal creditors, access to the 50% CGT discount for individual beneficiaries, and estate planning flexibility.
Can a family trust retain profits? No. A discretionary trust must distribute all income to beneficiaries each year. Undistributed income is taxed at 45%. This is why trusts are less suitable for businesses that need to reinvest earnings — a company structure is generally better for that purpose.
What is the cost of setting up a family trust in Australia? Typically $1,500 to $3,000 for setup, including trust deed preparation and corporate trustee registration. Annual running costs are $1,500 to $3,000 per year on top of that.
Want to understand whether a family trust is right for your situation? Our Chartered Accountants advise on trust setup, structure, and annual compliance. Call 02 9980 1556 or visit verusaa.com.au. 973 Pacific Hwy, Pymble NSW 2073. Monday to Friday, 9am to 5pm.
