Setting up a family trust: benefits and ATO scrutiny

A discretionary trust remains one of the most useful structures available to Australian business owners, and one of the most frequently misused. It offers genuine flexibility in how income is allocated and real separation between business risk and family assets. It also attracts sustained ATO attention, and arrangements that were common practice a decade ago now carry meaningful risk.

What a family trust actually does

A discretionary trust holds assets through a trustee for a class of beneficiaries — usually a family group — without any beneficiary having a fixed entitlement. Each year the trustee decides who receives what.

That discretion produces the two benefits people set them up for. Income can be allocated to beneficiaries on lower marginal rates rather than accumulating in one person's hands. And because no beneficiary owns a defined interest, a creditor pursuing one family member generally cannot reach the trust's assets.

The trade-off is that a trust cannot cheaply retain profit. Income not distributed by 30 June is taxed to the trustee at the top marginal rate. That is why most trading trusts pair with a corporate beneficiary — a bucket company — that can hold surplus income at the company rate instead.

The structure that usually works

For an operating business, the common arrangement is a discretionary trust as the trading entity, a company as trustee, and a second company as a corporate beneficiary.

The corporate trustee matters more than people expect. A trustee is personally liable for the trust's obligations, without limit. An individual trustee carries that exposure against their own assets; a company carries it against a shell with no assets. The cost difference is a few hundred dollars a year.

The deed itself deserves reading. Who can be a beneficiary, whether a corporate beneficiary is included, whether income and capital can be streamed separately, and — critically — who holds the appointor role and what happens to it on death. The appointor can remove and replace the trustee, which makes them the person actually in control.

Where the ATO is looking

The Commissioner's position on section 100A has reshaped what is safe. In broad terms, where a beneficiary is made presently entitled to trust income but somebody else enjoys the benefit, and the arrangement was entered into to reduce tax, the distribution can be disregarded and taxed to the trustee at the top rate.

The arrangement most affected is the one where adult children are made entitled to income they never actually receive, with the funds retained by the parents or applied to family expenses. That was widespread. It is now high risk.

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If a beneficiary is presented with a distribution they never see, never control and cannot call for, treat the arrangement as exposed and fix it before the next resolution is signed.

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Distributions where the beneficiary genuinely receives the money, has it paid into an account they control, and can deal with it freely remain effective. So do distributions to a corporate beneficiary, provided the entitlement is either paid across or placed on complying Division 7A terms rather than left outstanding indefinitely.

Resolutions, and why the date matters

The trustee must resolve to distribute by 30 June. This is the point where trusts most often fail, and it fails quietly — nothing goes wrong until an audit years later.

The resolution should identify beneficiaries and their shares, deal separately with franked distributions and capital gains if you intend to stream them, and be signed before the year ends. A resolution reconstructed in September, dated June, is not a document you want to rely on.

What it costs to run

Expect an annual trust tax return, financial statements, resolutions, ASIC fees for the trustee company, and higher accounting fees than a sole trader arrangement. Land tax is also worth checking: several states remove or reduce the land tax threshold for trusts, which can outweigh the tax benefit for a property-holding trust.

For a business earning modest profit distributed to one person, the structure often costs more than it saves. For a family group with several adult beneficiaries, meaningful profit and real trading risk, it usually earns its keep several times over.

Before you set one up

Read the deed before signing it rather than after. Use a corporate trustee. Decide who holds the appointor role and what happens to it. Plan how corporate beneficiary entitlements will actually be funded. And put 30 June in the calendar as a hard date, every year, for as long as the trust exists.