What Is a Family Trust in Australia? A Plain-English Guide

🏛️ What is a family trust?🔗

A family trust (the technical term is a discretionary trust) is a legal arrangement where one person or company (the trustee) holds assets on behalf of a group of people (the beneficiaries), usually members of the same family. The trustee has the power to decide, year by year, how the income and assets are distributed among those beneficiaries.

Picture a family running a small business or building an investment portfolio. Instead of holding shares or property in their own names, they hold those assets inside a trust. The trust earns the income, and the trustee decides each financial year who gets what slice of it.

🔧 How it actually works🔗

Think of a family trust like a club with a rulebook. Here are the five roles you need to know.

• Settlor. Formally establishes the trust, usually by handing over a small sum (often $10). A nominal figure who plays no ongoing role.
• Trustee. Runs the trust day to day, makes all the decisions and is legally responsible for its obligations. Using a company as trustee is common because it limits personal liability.
• Beneficiaries. The people who can receive income or assets, usually the parents, adult children, and sometimes a family company.
• Appointor. Often overlooked, but the most powerful role. The appointor can hire and fire the trustee, so whoever holds it has ultimate control.
• Trust deed. The legal document that sets out the rules: who the beneficiaries are, what the trustee can do, and how the trust is wound up. Think of it as the trust's constitution.

💡 Why Australians use them🔗

Income splitting and tax flexibility. Australia uses a progressive tax system, with a top rate of 47% (including the Medicare levy) on income above $190,000. A discretionary trust lets the trustee direct income to whichever adult beneficiaries have the lowest taxable income in a given year. One catch: minors under 18 are taxed at penalty rates on unearned income above a small threshold (currently $416 per year), so you cannot simply funnel income to your kids.

Asset protection. Assets held inside a trust are generally not owned by any individual, so if a beneficiary or trustee goes bankrupt, creditors typically cannot access them in the same way. This makes trusts popular with business owners and professionals with personal liability exposure. That said, the protection is not bulletproof.

Estate planning and succession. Assets held in a trust do not form part of a deceased estate in the same way personal assets do. They continue to be governed by the trust deed, which can help avoid contested estates and makes it easier to transfer wealth across generations.

🧾 How income distribution works🔗

Each year, before 30 June, the trustee must make a formal resolution deciding how to distribute the trust's income. If no valid resolution is made in time, the ATO can tax the undistributed income at the top marginal rate. This is a hard deadline, not a suggestion.

Compare that to one person receiving the full $120,000 at the top marginal rate of 47%. The tax saving across the family group can be substantial. The exact saving depends on each person's other income, deductions and circumstances, which is why a licensed accountant is essential for modelling it properly.

👥 Who it suits, and who it does not🔗

It suits: family business owners who want to split income among family members involved in the business, investors with multiple adult family members on different income levels, people with significant assets who want a layer of protection, and those planning intergenerational wealth transfer.

It does not suit: single-income earners with no one to distribute to, people wanting to negatively gear property inside a trust (losses are quarantined), people who want the main-residence CGT exemption on a home, and people who cannot afford the ongoing costs of running the structure properly.

🎯 The essential: The tax benefit only appears when there is more than one adult beneficiary on different rates. If there is no one to split with, the main advantage of a family trust disappears entirely.

🚩 The real drawbacks🔗

The conversation often focuses too much on the benefits. Here are the genuine downsides, stated plainly.

• Setup cost. Typically $1,500 to $3,000 or more for the deed, plus $500 to $1,500 or more for a corporate trustee. Some states charge stamp duty on the deed.
• Ongoing administration. Every year needs a formal trustee resolution before 30 June, a separate tax return, and accounting fees of $1,000 to $2,500 or more. Not a set-and-forget structure.
• Complexity. The rules have tightened, and the ATO has increased scrutiny under section 100A. Getting distributions wrong can see income taxed at the top rate.
• No main-residence CGT exemption. A home held in a trust does not qualify for the exemption individual owners receive.
• Trust losses are quarantined. A loss stays inside the trust and cannot offset a beneficiary's personal income. This is the opposite of negative gearing.

❓ Frequently asked questions🔗