Family Trust vs Discretionary Trust Australia: What Every Business Owner Needs to Know
Many Australian business owners, investors, and professionals use the terms family trust and discretionary trust interchangeably. In most everyday conversations, they refer to the same thing. But there are important legal and tax distinctions that affect how your trust is set up, how it is taxed, and what protections it provides.
Understanding the difference helps you make better decisions about your business structure, tax planning, and asset protection. It also ensures you avoid costly mistakes with the ATO.
This guide explains what each structure is, how they compare, when they work well, and what to watch out for — particularly around the Family Trust Election and the ATO's current focus on Section 100A.
If you want to review your current structure or set up a new trust, Trinity Accounting Practice can guide you through every step.
What Is a Trust?
A trust is a legal arrangement. One party — the trustee — holds assets on behalf of another party — the beneficiaries. The trustee manages and controls those assets according to the rules set out in the trust deed.
A trust is not a separate legal entity in the same way that a company is. The trustee is the legal owner of the assets. The beneficiaries hold the beneficial interest. This separation between legal ownership and beneficial ownership is what makes a trust a powerful tool for asset protection and tax planning.
Trusts are commonly used in Australia to hold business interests, investment properties, share portfolios, and family wealth. They are a core part of many professional practice structures and small business arrangements.
What Is a Discretionary Trust?
A discretionary trust is a trust where the trustee has full discretion over how income and capital are distributed to beneficiaries each year.
Beneficiaries in a discretionary trust do not hold fixed entitlements. They are simply members of a class of potential beneficiaries listed in the trust deed. Whether they receive anything in a given year — and how much — is entirely at the trustee's discretion.
This flexibility is what makes discretionary trusts so valuable for tax planning. Each year, the trustee can direct income toward the beneficiary with the lowest marginal tax rate. This reduces the overall tax paid by the family group or business group.
For example, if a business generates $200,000 of income, the trustee might distribute $45,000 to a spouse, $45,000 to an adult child, $45,000 to another adult child, and $65,000 to a company as a corporate beneficiary. Each person pays tax at their own marginal rate, rather than all income being taxed in one person's hands.
For more on how distributions work and interact with business planning, see our business advisory services.
What Is a Family Trust?
A family trust is a type of discretionary trust — but with one specific addition. A family trust has made a Family Trust Election (FTE) with the ATO, formally designating a central individual (the test individual) and locking in the family group for tax purposes.
Without the election, a discretionary trust is simply a discretionary trust. Once the election is made, it becomes a family trust in the technical tax sense.
Most people who run a family business or hold family assets through a trust refer to it as a family trust regardless of whether the election has been made. But the legal and tax distinction matters — particularly when you want to access certain tax concessions available only to family trusts.
The Family Trust Election — Why It Matters
The Family Trust Election is a formal choice made on an ATO form. Once made, it is difficult to reverse. It has significant tax consequences.
What the election does:
Making the FTE allows the trust to:
- Transfer losses between entities within the family group (important for trusts with investment losses or business downturns)
- Distribute franked dividends and capital gains to specific beneficiaries under streaming rules
- Retain access to tax offsets attached to franked distributions
The family group restriction:
Once the FTE is made, distributions must remain within the designated family group. If income or capital flows outside the family group — for example, to a friend's company or a business associate's entity — the trust may be subject to family trust distribution tax, which is taxed at the top marginal rate plus Medicare levy.
When you should consider making the election:
- When the trust holds shares that carry franking credits
- When you want to stream capital gains to specific beneficiaries eligible for the 50% CGT discount
- When the trust has carried-forward losses you want to access
- When the trust's income flows through to a company that is part of the family group
When you should not rush into the election:
- When the trust has beneficiaries outside the strict family group such as business partners or external investors
- When the trust deed includes a wide range of non-family beneficiaries that you genuinely want to access in the future
The decision to make the FTE requires careful consideration. At Trinity Accounting Practice, we review each trust's situation before advising on whether and when to make this election.
The ATO provides an overview of trusts and their tax treatment on their trusts information page.
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Corporate Trustee vs Individual Trustee
One of the most important structural decisions when setting up a trust is whether to use an individual trustee or a corporate trustee — a company that acts as trustee.
Individual trustee:
- Simple and low-cost to set up
- The trustee's personal assets may be at risk if the trust is sued
- If the trustee dies or loses capacity, asset transfers and re-registration of titles are required
- Can create complications when the trustee changes
Corporate trustee:
- A company acts as trustee
- The company provides a layer of separation between personal assets and trust liabilities
- When directors change, the company continues — no need to re-register assets
- Provides greater asset protection in commercial disputes
- Cleaner for succession planning
- Adds a small annual cost for company registration and ASIC fees
For most clients at Trinity, a corporate trustee is the preferred structure — particularly for trusts that hold significant assets or operate a business. The additional cost is modest and the protection is meaningful.
Our business advisory team can help you decide which trustee structure fits your situation.
Key Roles in a Trust Structure
The Settlor
The settlor is the person who creates the trust by providing the initial trust property — typically a nominal amount such as $10. The settlor signs the trust deed. Once the trust is established, the settlor has no further role and should ideally have no ongoing connection to the trust (particularly as a beneficiary) to avoid adverse tax treatment.
The Trustee
The trustee is the legal owner of the trust's assets. The trustee manages the trust, makes investment and business decisions, and distributes income to beneficiaries. The trustee owes fiduciary duties to the beneficiaries and must act in their best interests. The trustee can be an individual or a company.
The Appointor
The appointor holds the most powerful position in the trust. The appointor has the right to remove and replace the trustee. Because the trustee controls distributions, controlling the trustee means controlling the trust. Whoever holds the appointor role effectively controls the trust. This role is often overlooked when setting up a trust, but it is critical for succession and family governance.
The Beneficiaries
Beneficiaries are the people or entities entitled to receive income or capital distributions from the trust. In a discretionary trust, beneficiaries have no fixed right to receive anything — they are simply eligible to receive distributions at the trustee's discretion. The trust deed will define the class of eligible beneficiaries, typically including parents, children, grandchildren, siblings, and related companies and trusts.
The Trust Deed
The trust deed is the governing document. It sets out the powers of the trustee, the class of beneficiaries, the rules around distributions, the investment powers, and the circumstances under which the trust can be wound up. A well-drafted trust deed gives the trustee maximum flexibility while protecting the beneficiaries. A poorly drafted deed can create restrictions that are difficult and expensive to fix later.
Benefits of a Discretionary or Family Trust
Flexible income distribution
The trustee distributes income each year to beneficiaries in proportions that minimise overall tax. Income flows to those with the lowest marginal rates first.
Asset protection
Because beneficiaries do not legally own the trust assets, those assets are generally protected from a beneficiary's personal creditors. This is particularly valuable for professionals, contractors, and business owners who carry personal liability risk.
Capital gains tax planning
Trusts can access the 50% CGT discount when assets are held for more than 12 months. The discount can be streamed to individual beneficiaries who are eligible, reducing the CGT payable on asset sales. See the ATO's guidance on the CGT discount for more detail.
Franking credit streaming
After making a Family Trust Election, the trust can stream franked dividends and the attached franking credits to specific beneficiaries. This ensures the franking credits are used by beneficiaries who can actually benefit from them.
Succession planning
The trust can continue from one generation to the next by changing the trustee and appointor. Assets do not need to pass through a will. This simplifies estate planning and can reduce delays and disputes.
Income splitting across a family group
By distributing income across multiple family members, the effective tax rate on the trust's income can be significantly lower than if all income was earned by one person.
For professional services businesses such as medical practices, law firms, and dental practices, trusts are often used as part of a broader structure. Our specialist team supports medical professionals, dental practices, and legal practitioners with trust setup and tax planning.
Section 100A and the ATO's Increased Scrutiny
Section 100A of the Income Tax Assessment Act 1936 has become one of the most significant trust tax risks in recent years. The ATO has been actively auditing family trusts where income is distributed to a beneficiary but the economic benefit flows to a different person.
What Section 100A covers:
Section 100A applies when a trust distributes income to a beneficiary, but there is a reimbursement agreement in place — meaning someone other than the beneficiary actually receives or uses the money. If the ATO determines that Section 100A applies, the distribution is treated as if it never happened, and the trustee becomes assessable for the income at the top marginal rate.
Common situations that attract ATO attention:
- Income distributed to an adult child but retained in the trust or used by parents
- Income distributed to a related company but not actually paid out
- Income distributed to a low-income beneficiary who does not actually receive the funds
- Unpaid present entitlements that accumulate without genuine loan arrangements
What you should do:
- Ensure distribution resolutions are passed before 30 June each year
- Ensure beneficiaries who receive distributions actually have access to those funds
- Review any unpaid present entitlements and ensure they are properly documented
- Review your trust's distribution history with an adviser who understands the current ATO risk environment
You can read the ATO's guidance on Section 100A reimbursement agreements here.
Our team at Trinity Accounting Practice reviews trust distribution arrangements and ensures your trust documentation is defensible under ATO scrutiny.
Annual Distribution Resolutions — A Critical Deadline
One of the most common and costly mistakes we see in practice is missing the 30 June distribution resolution deadline.
A discretionary or family trust must formally resolve how income will be distributed before 30 June each financial year. If no resolution is passed by 30 June, the ATO may treat the trust as having no valid distribution — meaning the trustee is assessed on the entire trust income at the top marginal rate, currently 47% including Medicare levy.
What the resolution must include:
- The name of each beneficiary receiving a distribution
- The amount or percentage of trust income they will receive
- The specific categories of income such as ordinary income, capital gains, and franked dividends where streaming is intended
- The signature of the trustee or, if a corporate trustee, the authorised director
Best practice:
We recommend preparing trust distribution resolutions in May or early June each year — before year-end — so there is time to review the tax position, compare beneficiary incomes, and make a deliberate decision. Waiting until after 30 June is too late.
For support with annual trust resolutions and tax returns, contact our team at Trinity Accounting Practice.
The ATO's trust income definition guidance explains how trust income is calculated for distribution purposes.
How Trusts Compare to Companies and Unit Trusts
Discretionary trust vs company
A company retains profits inside the entity and pays tax at the corporate rate — 25% for base rate entities and 30% for larger companies. Profits can be reinvested and grown inside the company. A discretionary trust generally cannot retain profits — all income must be distributed each year or the trustee is assessed at the top rate. A company provides strong asset protection. A trust provides income splitting flexibility that a company cannot. Many sophisticated structures use both — a trading company owned by a family trust, or a company as trustee of a family trust.
Discretionary trust vs unit trust
A unit trust gives each unitholder a fixed, proportional entitlement to income and capital. This is appropriate when you have external investors or joint venture partners who need certainty about their share. A discretionary trust offers no fixed entitlements — the trustee decides each year. Unit trusts are common in property syndications and managed investments. Discretionary trusts are more suited to family and closely held business situations.
Trust alongside an SMSF
Many clients hold a family trust alongside a Self-Managed Super Fund. The two structures serve different purposes — the trust for current-year income distribution and asset protection, the SMSF for long-term retirement savings in a concessionally taxed environment. Understanding how these structures interact is essential for effective long-term planning.
When a Family Trust Works Well
- When you run a profitable family business and want to distribute income across family members
- When you hold investment assets and want flexibility over distributions year to year
- When asset protection is a priority — particularly for professionals or business owners with personal liability exposure
- When you plan to pass wealth to the next generation and want to avoid assets going through probate
- When family members have different taxable income levels and you want to direct income to those with lower marginal rates
- When the trust holds shares in companies that generate franked dividends and you want to stream those credits to the most appropriate beneficiaries
When a Trust May Not Be the Right Choice
- When you want to retain and reinvest all profits inside the entity — a company is generally better for this
- When you have external investors or joint venture partners who require fixed, predictable entitlements
- When your income and personal situation are straightforward and a trust adds unnecessary cost and complexity
- When the trust deed is poorly drafted and restricts the trustee's ability to act efficiently
- When the annual compliance costs — trust tax return, distribution resolutions, corporate trustee ASIC fees — are not justified by the tax and asset protection benefits at your current income level
If you are unsure whether a trust is right for your situation, our business advisory team can review your options and give you a clear recommendation.
Disadvantages and Ongoing Obligations
Setting up a trust is not a set-and-forget exercise. There are real obligations and costs involved.
Trusts require a properly drafted trust deed, typically prepared by a solicitor. There is an ongoing obligation to prepare annual trust tax returns, pass distribution resolutions before 30 June, and maintain accurate records of all trustee decisions. If a corporate trustee is used, there are annual ASIC fees and company tax lodgement obligations. Trusts cannot carry losses — losses are trapped inside the trust and cannot be distributed to beneficiaries.
For clients who want professional support with trust accounting, tax returns, and annual compliance, our bookkeeping and accounting services keep everything in order throughout the year.
What to Bring to Your Consultation
If you are booking a meeting to review or set up a trust structure, bring the following:
- Your current trust deed if you already have a trust
- Your last two or three trust tax returns
- A list of current beneficiaries and their approximate income levels
- Details of any assets held in the trust or intended to be transferred in
- Your business or investment plans for the next three to five years
- Any concerns about asset protection, succession, or ATO compliance
Being prepared helps us give you specific, actionable advice from the first meeting.
How Trinity Accounting Practice Helps You
Ramy Hanna, Principal of Trinity Accounting Practice, holds Fellow memberships with the IPA, TIA, and NTAA and is a Registered Tax Agent. Our team has deep experience in trust setup, compliance, and tax planning for families, professionals, and business owners across Sydney and Australia.
We help you by:
- Reviewing your existing trust structure and identifying risks or inefficiencies
- Advising on whether a Family Trust Election should be made — and timing it correctly
- Reviewing annual distributions before 30 June to minimise tax legally and defensibly
- Preparing trust tax returns and trustee resolutions
- Reviewing Section 100A risks and ensuring your distribution arrangements are documented correctly
- Advising on corporate trustee setup for new or restructured trusts
- Connecting trust planning with SMSF, business structure, and long-term succession strategies
- Preparing financial statements for lenders if the trust needs to support a loan application through our Nexus Wealth Partners mortgage broking division
If you are working through a broader business or investment strategy, our Virtual CFO Services Australia team provides ongoing financial oversight, budgeting, and planning support.
You can explore all our services at trinitygroup.com.au/services or discover the industries we specialise in at trinitygroup.com.au/niches.
Next Steps
Family trusts and discretionary trusts are among the most powerful structures available to Australian families and business owners — but only when they are set up correctly, maintained properly, and reviewed regularly.
Whether you want to establish a new trust, review an existing one, or simply understand whether a trust is right for your situation, the team at Trinity Accounting Practice is ready to help.
Book a meeting with Ramy Hanna and the Trinity team:
Trinity Accounting Practice
159 Stoney Creek Road Beverly Hills NSW 2209
📞 02 9543 6804
📅 Book online — after-hours and weekend appointments available
Disclaimer
Disclaimer: This article provides general information only and does not constitute financial, legal, or tax advice. Every individual and business situation is different. You should seek professional advice tailored to your specific circumstances before making any decisions about trust structures, distributions, or tax planning. Trinity Accounting Practice is a registered tax agent. Contact our team for personalised guidance.
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