How to Use a Family Trust for Investing in Australia

A discretionary family trust is a legal structure where a trustee holds and manages assets for the benefit of a class of beneficiaries. The trustee has full discretion over how income is distributed each year - which is the source of both its tax planning power and its regulatory scrutiny:

• Key parties: Settlor (creates the trust and contributes a nominal amount - usually $10); trustee (manages the trust and makes distributions - ideally a corporate trustee/company); appointor (the power behind the throne - can remove and replace the trustee); beneficiaries (receive distributions at the trustee's discretion)
• Why discretion matters for tax: The trustee can distribute income to the beneficiary with the lowest marginal tax rate each year - splitting income across multiple family members (children over 18, low-income spouses) to minimise total family tax
• Asset protection: Trust assets are generally not available to creditors of individual beneficiaries (they have no fixed entitlement until distribution); particularly relevant for business owners with litigation exposure
• CGT discount preservation: Unlike a company (which pays 30% tax with no CGT discount), a trust can distribute a capital gain with the 50% discount preserved - the individual beneficiary pays CGT at their marginal rate on half the gain
• Estate planning: Trust assets do not form part of a deceased's estate - they continue under the control of the trustee/appointor, avoiding probate and potential family provision challenges
• Annual resolution requirement: By 30 June each year, the trustee must resolve (in writing) who receives what - failure to distribute by 30 June means the trustee is assessed on all trust income at the top marginal rate (47%)

---

The mechanics of trust distribution planning involve matching income to the beneficiary who pays the least tax on it - within the bounds of the rules:

• Low-income beneficiaries first: Adult children who earn below $18,200 (tax-free threshold) pay zero tax on trust distributions up to that amount - $18,200 distributed to each of three adult children = $54,600 taxed at 0%
• Division 6AA - under 18s: Minor beneficiaries (under 18) pay tax on trust distributions above $416/year at 47% penalty rate - trust income distributions to children are effectively penalised; this rule does NOT apply to capital gains or passive income from assets the minor inherited
• Spouse income splitting: If one spouse earns $180,000 and the other $30,000, distributing $60,000 of trust income to the lower-income spouse keeps them in the 32.5% bracket and saves ~$10,000 in tax vs the higher-income spouse receiving it
• Corporate beneficiary: Distributing to a bucket company (a company held by the trust) at 25% (base rate entity) caps tax at 25% and retains profits for reinvestment - but those retained profits can only be extracted later via franked dividends or Division 7A loans
• Streaming capital gains: Trusts can 'stream' specific capital gains to specific beneficiaries - allowing you to direct a discounted capital gain to a beneficiary who can use the discount most effectively (e.g., someone with capital losses to offset)
• Streaming franking credits: Since 2010, trusts can stream franking credits to beneficiaries who can best use them - e.g., a beneficiary in a lower bracket who receives a refund vs a top-rate beneficiary for whom the credit merely offsets liability

---

When a trust distributes income to a corporate beneficiary but does not immediately pay out the cash, an unpaid present entitlement (UPE) arises. The ATO has progressively tightened rules around UPEs to prevent them from being used as interest-free loans:

• What a UPE is: When the trustee resolves to distribute to the bucket company but doesn't actually transfer cash, the company has a legal right to the money - but it remains in the trust
• Division 7A loan risk: From 16 December 2009, UPEs owed to a private company are treated as loans under Division 7A - they must be put on a compliant loan agreement (minimum benchmark interest rate 8.27% for 2024-25) and repaid within 7 years (or 25 years for loans secured by real property)
• The benchmark interest rate: ATO sets this annually; for 2024-25 it is 8.27% - the UPE must attract at minimum this rate or the shortfall is treated as an unfranked dividend to the shareholder
• Sub-trust option (pre-2023 UPEs): The ATO previously allowed UPEs to be held in a sub-trust rather than triggering Div 7A - this approach is now effectively closed for new UPEs arising after 1 July 2022 following ATO guidance
• Practical compliance: For a trust distributing $100,000 to a bucket company annually, the UPE must either be paid out (cash transferred to the company) or placed on a compliant Div 7A loan; the company then has $100k available for reinvestment at 25% tax
• Shareholder loan repayments: Minimum annual repayments on Div 7A loans must be made by 30 June each year - missing a repayment triggers the entire loan balance becoming a deemed dividend

---

Section 100A of the ITAA 1936 is an anti-avoidance provision that can make trust distributions taxable to the trustee (at 47%) where there is a 'reimbursement agreement' - where the economic benefit of a distribution goes to someone other than the beneficiary who is taxed on it:

• The core concern: If you distribute $50,000 to an adult child who pays tax at 0% but the child then pays the money back to a parent or uses it for family expenses, the ATO may apply s100A to tax the trustee at 47% instead
• PCG 2022/2 - the traffic light framework: The ATO's practical guidance classifies trust arrangements into green (low risk), yellow (medium risk - further review), and red (high risk - ATO will likely challenge):
• Green zone: Distributions to adult children who use the funds for their own purposes (rent, car, study, savings); beneficiary genuinely benefits from the distribution; ordinary family financial arrangements
• Yellow zone: Distributions where there is some concern but not clear-cut avoidance - e.g., adult children who receive distributions but parents pay all their living costs; the ATO will look at the full picture
• Red zone: Circular arrangements where distributions go back to the original asset holder; distributions to beneficiaries who immediately contribute funds back to the trustee or a related entity; creating obligations to repay
• Documentation: Maintain trustee minutes, bank records showing actual payment, and evidence the beneficiary used the funds - the ATO is reviewing trust arrangements from as far back as 2014 in current audit programs
• Exempt 'ordinary family dealings': Genuine family arrangements where a parent assists an adult child (paying their mortgage, buying them a car) from funds already distributed and genuinely enjoyed by the child are generally not s100A - the key is that the child received the economic benefit

---

Land tax is often the decisive reason to reconsider holding investment property inside a trust - particularly in Victoria:

• No threshold in trust: In most states, a discretionary trust does not qualify for the land tax-free threshold that individual owners receive; every dollar of land value is taxed from the first dollar
• NSW: Individuals get a $1,075,000 threshold (2024); trusts receive no threshold - tax at the surcharge rate applies from $0
• VIC: Individuals get a $300,000 threshold (2024); discretionary trusts are subject to a 0.5% surcharge on top of the standard rate with no threshold
• QLD: Individuals and discretionary trusts both receive a $600,000 threshold in Queensland - no disadvantage in QLD (as at 2025)
• SA: Individual threshold $761,000; trust $25,000 - effectively no threshold; similar situation to NSW
• WA: Individual threshold $300,000; trusts assessed at the individual rate but all properties in the trust are aggregated without threshold
• Decision framework: For high-value property portfolios in NSW or VIC, the annual land tax cost inside a trust can exceed the income tax saving from distribution flexibility - model the net position carefully before establishing or transferring property into a trust

---

Family trusts involve setup costs ($2,000-$5,000 including corporate trustee) and ongoing accounting ($2,000-$5,000/year for trust accounts and tax returns). They only make sense in specific circumstances:

• Makes sense: Multiple adult family members in different tax brackets available as beneficiaries; significant business or investment income to distribute; asset protection concerns (e.g., professional practice owners, business operators with litigation exposure); significant capital gains from share or business portfolios
• Doesn't make sense: Single-person investing with no family members in lower brackets; small investment portfolios where accounting costs exceed tax savings; investment property in NSW/VIC where land tax surcharge eliminates the benefit
• Doesn't work for: Negative gearing on property - trust losses cannot be distributed to beneficiaries (they are trapped in the trust); this is one of the most common misconceptions about trusts
• Alternative for property: Individual or joint names for investment property (access full land tax threshold, negative gearing flows through directly); use a trust for share and business assets where the land tax issue doesn't apply
• Review periodically: As beneficiaries' circumstances change (adult children earn more, spouse returns to work), the trust's income splitting advantage diminishes - review annually whether the structure still earns its accounting cost

---

Setting up and running a family trust takes time and professional fees. While you're building the right structure, Roopon helps you save on everyday spending - groceries, fuel, dining, and entertainment - so more of your income can be directed toward your investment goals. Our member prize draws (per campaign terms) adds another layer of value for members.

Join Roopon from $19.99/month. ABN: 89 656 278 830.

---

Join Roopon today for partner discounts and FREE included prize-draw entries per your plan and published campaign terms.

Join ROOPON Now