How to Use a Family Trust in Australia: Tax Benefits, Distributions and Compliance

A family trust (formally, a discretionary trust) is a legal structure in which a trustee holds assets on behalf of a group of beneficiaries. The trustee has discretion over how trust income and capital are distributed among the beneficiaries each year - hence 'discretionary'. Because the trustee can direct income to whichever beneficiary has the lowest marginal tax rate, family trusts are commonly used to reduce overall family tax.

The key parties: the settlor (the person who establishes the trust by settling a nominal amount - typically $10 - onto the trustee); the trustee (the legal owner of the assets, responsible for compliance - usually a company for asset protection and continuity); the beneficiaries (family members and entities named in the trust deed who may receive distributions); and the appointor (the person with power to remove and replace the trustee - the most powerful position in the trust structure).

A trust is not a separate legal person - it cannot sue or be sued in its own name. The trustee (usually a corporate trustee) acts on behalf of the trust. The trustee is personally liable for trust debts, which is why a corporate trustee with limited liability is strongly preferred.

The trust deed is the founding document - it defines the trust's name, the trustee's powers, who the beneficiaries are (and how they are defined), how income can be streamed, whether capital and income beneficiaries can differ, and what happens to trust assets when the trust vests (typically after 80 years, the maximum trust period in most Australian states).

A well-drafted deed gives the trustee broad investment and distribution powers and clearly defines the class of eligible beneficiaries. A poorly drafted deed can inadvertently exclude intended beneficiaries, restrict investment options, or create stamp duty complications on resettlement if the deed needs to be varied.

Stamp duty is payable on the settlement of a trust deed - typically a nominal amount (often $200–$500 depending on the state). The deed should be stamped in the relevant state before any assets are transferred into the trust.

The core tax benefit of a discretionary trust is income splitting - directing trust income to beneficiaries with lower marginal tax rates. For example, if a trust earns $300,000 of investment income, distributing $18,200 to each of four adult children (below the tax-free threshold) and the remainder to a company beneficiary (taxed at 25% for base rate entities) can dramatically reduce the combined family tax compared to one individual holding all the income at 47%.

The trustee must resolve distributions before 30 June each income year (or before the date specified in the trust deed if earlier). A distribution resolution made after 30 June is generally invalid - the ATO will tax the trustee on any undistributed income at the top marginal rate (47%) under section 99A of the ITAA 1936.

Distributions must be recorded formally in trustee resolutions and reflected in trust accounts. The beneficiary must be presently entitled to the income - meaning the trustee has resolved to distribute a specific amount or share to that beneficiary - for the income to be taxed in the beneficiary's hands rather than the trustee's.

Since 2010, trust deeds and trust tax returns can stream specific classes of income - particularly franked dividends (with attached franking credits) and capital gains (eligible for the 50% CGT discount if the underlying asset was held more than 12 months) - to particular beneficiaries separately from other income.

Streaming allows you to direct franked dividends (and their franking credits) to beneficiaries who can best use the franking credits (e.g., a beneficiary in a lower tax bracket who will receive a refund of franking credits). Capital gains can be streamed to beneficiaries who are individuals or SMSFs (who apply the 50% CGT discount) rather than to company beneficiaries (which do not receive the discount).

Streaming rules are complex - the trust deed must specifically permit streaming, the trustee must make a valid specific entitlement resolution, and the trust tax return must correctly reflect the streaming. Errors in streaming can cause the ATO to treat the trust as if it did not stream, allocating income proportionally - potentially a worse tax outcome.

Section 100A of the ITAA 1936 is the ATO's primary anti-avoidance tool against trusts. It applies when a beneficiary is made presently entitled to trust income but the economic benefit does not actually flow to that beneficiary - instead, someone else (typically the trustee or another family member) benefits from the funds.

A classic section 100A scenario: an adult child is nominated as a beneficiary and their entitlement is used to repay a loan or cover expenses of the parent rather than being paid to the child. Another scenario: trust income is distributed to a low-tax-rate beneficiary who then gifts or loans the after-tax amount back to the trustee or another family member.

The ATO's 2022 guidance (TR 2022/4 and PCG 2022/2) significantly clarified its section 100A position. The ATO identified 'green zone' arrangements (ordinary family reimbursement agreements unlikely to be examined) and 'red zone' arrangements (aggressive structures that will be audited). Trust distributions to adult children where the benefit genuinely flows to the child are generally low-risk. Distributions where the cash is recycled back to the parents or the business are high-risk.

If section 100A applies, the beneficiary's entitlement is void - the trustee is assessed on the income at the top marginal rate (47%). Section 100A can also apply retrospectively on a 4-year amendment window (or longer in fraud/evasion cases).

A trust with Australian-source income must lodge an annual trust tax return. The return reports total trust income, deductions, and the net income of the trust (which may differ from accounting income due to tax adjustments). Each beneficiary's share of trust net income is reported and must be declared by the beneficiary in their individual tax return.

The trustee is also responsible for: maintaining trust accounts (annual financial statements); keeping trustee resolution records (distribution resolutions, investment decisions, loans); and managing any Division 7A implications if the trust owes money to a company beneficiary (trust distributions to a company that are not paid out must be treated as a deemed dividend under Division 7A unless put on a complying loan agreement).

Trusts are subject to land tax in each state - most states do not provide the primary residence exemption to trusts, and some states (Victoria, New South Wales, Queensland) impose surcharge rates on trusts holding residential property. Check land tax implications in your state before transferring residential property into a trust.

Roopon members access exclusive discounts on accounting services, financial planning tools, and professional advice across Australia. Join from $19.99/month to start saving - plus FREE included prize-draw entries per your plan and published campaign terms.

Ensure your trust stays compliant with these annual actions:

• Pass a formal distribution resolution before 30 June each year - undistributed income is taxed at 47%
• Confirm each nominated beneficiary is present and entitled under the trust deed - check the deed's beneficiary class definition
• Document that economic benefit flows genuinely to each beneficiary - do not cycle distributions back to the trustee or another party (section 100A risk)
• Check any Division 7A exposure - if a company beneficiary received a distribution that was not paid out as a dividend, a complying loan agreement is required
• Prepare trustee minutes and resolutions for all material decisions (distributions, investments, loans)
• Lodge the trust tax return and all beneficiary tax schedules by the lodgement deadline
• Review land tax obligations in each state where trust holds property - surcharge rates apply in some states
• Model the trust vesting date (typically 80 years) - a trust approaching vesting requires advance planning to avoid a deemed CGT event

Trust compliance errors - particularly late distribution resolutions and section 100A risks - can be expensive. Annual review with a trust-specialist accountant is strongly recommended.