How to Set Up a Family Trust in Australia: Structure, Tax Benefits and CGT Implications

A family trust is a discretionary trust - a legal structure in which a trustee holds assets on behalf of a class of beneficiaries and has complete discretion to decide how trust income and capital are distributed among those beneficiaries each year. 'Family trust' is the common name; the legal document is called a discretionary trust deed.

The key parties in a family trust structure are: (1) the settlor - the person who establishes the trust (typically a solicitor or accountant who contributes a nominal sum, e.g., $10) to avoid stamp duty issues; (2) the trustee - the person or company that holds the trust assets and makes all distribution decisions (commonly the family's private company acting as corporate trustee); (3) the beneficiaries - the class of people and entities eligible to receive distributions (typically the principal family members, their children, and associated companies and trusts); and (4) the appointor - the person with the power to replace the trustee, making them effectively the most powerful party in the structure.

A trust is not a separate taxpayer for income tax - the trustee lodges a trust tax return, but the income is taxed in the hands of the beneficiaries at their individual marginal rates (or held in the trust and taxed at 47% if not distributed). The trustee's discretion over distributions is the core tax planning mechanism.

Income splitting is the primary tax benefit of a discretionary trust. By distributing trust income across multiple beneficiaries (spouse, adult children, the trustee company), a high-income family can reduce the overall tax on investment or business income by using each beneficiary's lower marginal rate brackets. A family with $100,000 in trust investment income can distribute $18,200 to each of four adult children (the tax-free threshold) and pay no tax on $72,800 of that income - versus paying $34,500+ if the same income were in the hands of a single high-income earner.

CGT 50% discount preservation: discretionary trusts retain the individual 50% CGT discount on assets held for more than 12 months. When a trust distributes a discounted capital gain to an individual beneficiary, the beneficiary includes only 50% of the gain in their assessable income. Companies do not receive the 50% discount - this is a key advantage of trusts over companies for holding appreciating investments.

Asset protection: trust assets are generally not available to the creditors of individual beneficiaries (since beneficiaries do not own the trust assets - the trustee does). This makes a family trust useful for professionals and business owners facing litigation or insolvency risk. However, trust assets can be at risk if the trustee is the debtor - corporate trustees are preferred because they limit liability exposure.

Estate planning flexibility: trust assets do not form part of a beneficiary's estate and are not distributed under their will. The appointor (or successor appointor) controls the trustee succession and therefore the distribution of trust assets across generations - providing estate planning flexibility outside the formal probate process.

Each year, the trustee must resolve to distribute trust income before 30 June (or the date specified in the trust deed). If no valid resolution is made before 30 June, the trustee is assessed on all undistributed income at the top marginal rate (47%) - a significant penalty for administrative failure.

The trust deed defines the class of eligible beneficiaries. Distributions can only be made to people and entities within that class. Attempting to distribute to someone not in the beneficiary class is not effective for tax purposes and may trigger penalties.

Beneficiaries must include their trust distribution in their assessable income in the income year the trust earns the income - regardless of when or whether they actually receive the cash. This is the trust 'present entitlement' concept: a beneficiary who is entitled to trust income is taxable on it even if the cash remains in the trust as a loan.

Minor beneficiaries (under 18) who are not in full-time employment are subject to the minor beneficiary rules (sometimes called the kiddie tax): trust distributions to minors are taxed at penalty rates above a low threshold ($416 for 2024–25), eliminating income splitting to children under 18 for most families.

Trust losses cannot be distributed to beneficiaries - they are quarantined inside the trust and can only be offset against future trust income. This is a significant limitation compared to a partnership or individual investor who can offset losses against other income. Trust losses are subject to trust loss rules that restrict their use if the trust's control or economic interests change.

Unpaid Present Entitlements (UPEs): when a trust resolves to distribute income to a beneficiary (particularly a company beneficiary) but does not actually pay the cash, the amount owed becomes a UPE - an interest-free loan from the trust to the beneficiary. The ATO's Division 7A rules apply where a trust has UPEs owing to a private company beneficiary - these must be structured as compliant loans (minimum interest rate, maximum term) or the UPE may be treated as an unfranked dividend in the hands of the company's shareholders.

Division 7A risk: if a family trust owes UPEs to its corporate trustee or a company beneficiary controlled by the same family, the arrangement may trigger Division 7A - effectively forcing the trust to pay interest at the ATO's benchmark rate (8.77% for 2024–25 - note: UPE-specific rate may differ from LRBA rate; confirm with your accountant) and to structure repayments over a maximum 7 or 25 year term.

Transferring existing assets into a family trust is a CGT event - the transfer is treated as a disposal of the asset at market value, potentially triggering an immediate capital gain. For assets with significant embedded gains (investment properties, shares held for many years), the upfront CGT cost of transferring to a trust can be prohibitive.

Stamp duty also applies to transfers of real property into a trust in most Australian states, at full ad valorem rates (the same as a normal property sale). Some states provide exemptions for transfers to family members or self-managed super funds, but transfers to a trust are generally not exempt. The combination of CGT and stamp duty on a property transfer to trust can make the strategy uneconomical for established properties.

The practical implication: family trusts are most effective when established before the acquisition of assets. Buying a new investment property in a family trust from the outset avoids the transfer CGT and stamp duty. Retrofitting an existing investment property into a trust after purchase typically triggers both taxes and is rarely advisable.

New businesses or investment portfolios being established from scratch are ideal candidates for a family trust structure - all future growth accrues in the trust without triggering an upfront CGT event.

Establishing a family trust costs approximately $1,500–$3,000 in legal and accounting fees. A corporate trustee (a Pty Ltd company established to act as trustee) adds a further $1,000–$2,000 in company establishment costs - but is strongly recommended for asset protection and operational continuity.

Ongoing annual obligations include: trust tax return lodgment (accounting fees typically $1,500–$4,000 per year depending on complexity); trustee resolution documentation (written minutes of the distribution resolution before 30 June each year); trust deed compliance review periodically; and ASIC annual review fee for the corporate trustee (approximately $63 per year in 2024–25).

A family trust is worth the cost when: the annual tax saving from income splitting exceeds the ongoing administration cost; asset protection is a meaningful concern; the trust holds growth assets where the CGT 50% discount preservation is valuable; or estate planning flexibility is a priority. For a family with $100,000+ of annual investment or business income being split between multiple beneficiaries, the trust structure typically pays for itself many times over.

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Work through these steps when considering a family trust:

• Engage a solicitor to draft a discretionary trust deed - do not use generic online templates for complex family structures
• Establish a corporate trustee (Pty Ltd) rather than an individual trustee - protects personal assets and provides operational continuity
• Identify the appointor carefully - the appointor controls who acts as trustee and is the most powerful role in the structure
• Confirm the beneficiary class in the trust deed covers all family members and entities you may want to distribute to in future
• Do not transfer existing appreciating assets into a trust without modelling the CGT and stamp duty costs - both may apply immediately
• Establish the trust before acquiring new investment assets - buy shares, property, or business interests in the trust name from the outset
• Make a valid trustee distribution resolution in writing before 30 June each year - failure to do so results in 47% tax on undistributed income
• Be aware of minor beneficiary rules - distributions to children under 18 are taxed at penalty rates above $416
• Structure UPEs to corporate beneficiaries as Division 7A-compliant loans - get accounting advice before leaving amounts unpaid
• Review trust deed terms with an accountant periodically - trust law and ATO guidance evolve and deeds can become non-compliant

A family trust is a long-term structure requiring careful setup and ongoing discipline. The tax savings are real and significant for the right families - but professional legal and accounting advice at establishment is essential.