Trusts are widely used in Australia, with close to one million trust returns lodged and hundreds of billions of dollars flowing through trusts each year.
Trusts play a central role in the Australian business and investment landscape. The Australian Taxation Office reported 1,022,229 trust tax returns for 2022–23, with total business income of approximately $489 billion across the trust population. At the same time, the Australian Bureau of Statistics recorded 2.73 million actively trading businesses at 30 June 2025, underscoring how common non-company structures remain in practice.
These figures explain why trusts continue to feature heavily in business structuring, succession planning, and investment ownership—particularly for family groups, founders, and privately held enterprises.
This guide explains the practical “how it works” of trusts (not theory), with added sections on:
General information only. Trust outcomes depend on the deed, the facts, and current law. Get advice before implementing.
A trust is a legal relationship in which a trustee holds assets under a trust deed and must manage them for the beneficiaries.
A trust is best understood as a fiduciary obligation, not a separate legal person like a company.
A trust is not a separate legal entity like a company. Instead, it’s a relationship created (usually) by a trust deed.
In most commercial contexts, a corporate trustee is used because trustees can be personally liable for trust debts. A corporate trustee can help ring-fence liability (not eliminate risk—personal guarantees can still override structure).
Trusts are widely used because they provide flexible distributions, succession control, and practical ways to hold business and investments.
Trusts tend to be used where at least one of these is true:
Most Australian business trusts are either discretionary or unit trusts, depending on whether flexibility or fixed entitlements are required.
The most common trust types used in practice include:
A discretionary trust gives the trustee discretion to decide which beneficiaries receive income and/or capital each year. This flexibility is why discretionary trusts are common for founder-led family groups.
A unit trust has fixed entitlements—like shares. If you own 50% of the units, you are generally entitled to 50% of distributions (subject to deed terms). Unit trusts are common in joint ventures and property arrangements where ownership must stay proportional.
“Family trust” is used casually to mean a discretionary trust, but in tax, it can also refer to a trust that has made a Family Trust Election (FTE). An FTE can simplify certain tax issues, but it restricts who can benefit without triggering a penalty tax.
Service trusts can be used for staffing, leasing, or equipment arrangements—particularly in professional practices. They need strong commercial support and careful compliance.
Each structure solves a different problem. Choosing the wrong one often creates complexity rather than clarity.
A family trust is usually a discretionary trust where the trustee decides each year which eligible beneficiaries receive income or capital.
In practice, a discretionary trust works like this:
Important: “We’ll decide later” is usually not a strategy. Trust tax outcomes often depend on making valid decisions and records on time.
For founders and early-stage businesses, this decision often overlaps with broader structure planning. We explore these trade-offs in more detail in our guide on
startup accounting in Australia: choosing the right business structure.
Trusts can reduce risk concentration, but trustee liability, guarantees, and control issues mean asset protection is never absolute.
Three risk areas matter most:
Trustees are generally personally liable for trust debts. This is why a corporate trustee is commonly used where the trust undertakes commercial activities or borrows money.
Bank and landlord guarantees frequently override structural protection. Even the best structure cannot undo a personal guarantee once given.
Where one individual effectively controls the trustee, courts may treat trust interests as property in certain insolvency or family law contexts. Control, not labels, often determines outcomes.
Practical takeaway: Avoid holding high-risk trading assets and long-term passive investments in the same trust where asset protection is a genuine objective.
Family trusts allow flexible distributions; unit trusts provide fixed entitlements and clearer governance for joint ventures and co-owners.
Quick comparison (SME-practical)
| Feature | Family / discretionary trust | Unit trust |
|---|---|---|
| Economic entitlements | Flexible | Fixed (by units) |
| Best for | Single-family group | Joint ventures, unrelated parties |
| Income distribution | Trustee discretion | Proportional to units |
| Governance | Can be simpler, but must be disciplined | More formal (units, transfers, valuation) |
| Common risk point | Documentation, 100A integrity | Transfers, buy/sell, entitlement clarity |
A unit trust is often preferred when:
Trust tax usually follows present entitlement: beneficiaries are taxed if entitled, otherwise the trustee may be assessed.
The central tax concept for trusts is present entitlement:
If a beneficiary is made presently entitled to trust income, they are generally assessed on that share.
If income is not effectively dealt with, the trustee may be taxed, often at the top marginal rate under section 99A.
Family Trust Elections can simplify some outcomes, but they also restrict who can receive distributions without triggering penalty tax. Flexibility comes with boundaries.
Trusts don’t have one flat tax rate. Beneficiaries pay at their rates, or trustees may be taxed at top rates in some cases.
For Australian residents (18+), 2025–26 marginal rates are:
These figures exclude the Medicare levy, which is often an additional consideration.
Where the trustee is assessed under provisions like section 99A, it is commonly at (or aligned to) the top marginal outcomes, which is why missed resolutions and integrity problems can be expensive.
Practical takeaway: The real tax question is rarely “what is the trust tax rate?” It’s “who will be assessed, on what amount, and was it documented correctly?”
Most discretionary trusts require a compliant distribution resolution by 30 June to avoid trustee-rate tax outcomes.
For many discretionary trusts, income does not “automatically” flow to beneficiaries. Trustees typically must:
Most trust problems arise here—not from aggressive planning, but from poor documentation and timing.
Trust distributions must follow the deed and be documented on time. Strategies allocate income to intended beneficiaries within integrity rules.
A trust distribution strategy is not about cleverness. It’s about matching:
This is the “cleanest” strategy because it aligns entitlement, cash benefit, and records.
Example (simplified):
A discretionary trust earns $220,000 from a family business. A spouse is actively working in the business and needs cash for household costs. A distribution to that spouse can be commercially consistent—provided the deed allows it, and it’s documented correctly.
Trusts can create a tax liability for a beneficiary even if the trust retains cash for working capital. If you do this, you need a deliberate plan for:
Some groups use a company beneficiary to manage how much income is taxed at individual rates vs company rates. This can be effective, but it introduces governance and integrity considerations (including how entitlements are managed).
The worst “strategy” is leaving trust decisions to late June with incomplete accounts. Good outcomes usually need:
Tax planning support: Tax Planning Melbourne | Proactive Strategies for SMEs – 42 Advisory
Unit trusts suit joint ventures or multiple family groups where fixed economic interests and clearer governance are required.
Unit trusts are commonly used where:
Multiple unrelated parties or family groups invest together
Fixed ownership percentages must be maintained
Governance expectations are more formal
They can still offer flow-through taxation, but changes in unit holdings and distributions often carry additional tax consequences, requiring careful advice.
Section 100A can apply when a beneficiary is made entitled to trust income but someone else effectively benefits from that entitlement.
Section 100A is an integrity rule that can apply where there is a “reimbursement agreement” connected to a beneficiary’s entitlement to trust income. The ATO has published its view in TR 2022/4 and a compliance approach in PCG 2022/2.
Not every family arrangement is a problem. But risk rises where:
CPA Australia has also flagged the need for care in family trust distributions given ATO focus in this area.
Trust compliance includes a valid deed, trustee resolutions, accurate beneficiary reporting, annual tax lodgment, and records showing who benefited.
A practical annual compliance checklist:
Accounting systems and reporting support: Small Business Accounting Services Melbourne | Fixed-Fee – 42 Advisory
Trusts offer distribution flexibility; companies support retained profits and clearer governance—many groups use both together.
As a broad rule:
Trusts suit variable profit sharing and succession flexibility
Companies suit profit retention, reinvestment, and corporate governance
Many established groups combine both—for example, a discretionary trust owning shares in a trading company. The “right” answer depends on risk, growth plans, and who needs access to profits over time.
If your business operates in the startup or scale-up space, structure decisions should be integrated with tax, systems, and funding strategy. Our startup accounting and advisory services in Melbourne are designed around that integrated approach.
Most trust failures are governance failures: outdated deeds, wrong beneficiaries, late resolutions, and mixing risky and passive assets.
Common issues include:
Deeds that no longer support intended tax outcomes
Distributions to non-beneficiaries
Late or defective trustee resolutions
Underestimating trustee and guarantee risk
No documented succession for control roles like the appointor
None of these are theoretical problems—they are practical, recurring causes of disputes and adverse tax outcomes.
Trusts remain powerful tools in Australia, but they are not set-and-forget structures. When used thoughtfully, they support flexibility, succession, and long-term planning. When governance is weak, they often amplify risk instead of reducing it.