What is a discretionary trust and should your business use one?
Trusts are one of the most powerful and most misunderstood business structures in Australia. Used correctly, a discretionary trust can offer meaningful tax planning opportunities and strong asset protection. Used incorrectly, they add complexity and cost without much benefit.
Disclaimer: This article is general information only and is not financial or legal advice. Before setting up a trust, speak to a qualified accountant or solicitor.
What is a trust?
A trust is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries. The trustee has legal ownership, but beneficiaries have the beneficial interest, meaning they are entitled to income and benefit from those assets. Trusts have been used in Australian law for well over a century.
What is a discretionary trust?
A discretionary trust (also known as a family trust) gives the trustee full discretion over how income and capital are distributed among beneficiaries each year. This flexibility is the core advantage. Rather than one person paying tax on the full profit, income can be split among family members each paying at their individual rate, which is known as income splitting.
How does it work in practice?
Imagine a family trust earns $200,000 in profit. The trustee distributes $80,000 to a spouse, $60,000 to one adult child, and $60,000 to another. Each person pays tax at their own rate, which is often far lower than if one person received the full amount. Trust assets are also owned by the trust itself, providing protection from personal creditors of beneficiaries.
Trust types at a glance
Feature | Discretionary trust | Unit trust | Bare trust |
Income distribution | Flexible, trustee decides | Fixed by unit holdings | All to beneficial owner |
Best for | Family businesses, tax planning | Investment groups, joint ventures | SMSF property, asset holding |
Income splitting | Yes, core advantage | No | No |
Complexity | Moderate | Moderate | Low |
Corporate trustee: why it matters
A discretionary trust needs a trustee, either an individual or a company. Using a company as trustee (called a corporate trustee) is generally recommended. It adds a further layer of asset protection, makes it easier to add or remove people managing the trust, and provides greater continuity. eCompanies can register both the trustee company and trust deed together.
When should you use a trust vs a company?
A trust and company are not mutually exclusive. Many businesses use both, with a discretionary trust owning the shares of a trading company. A trust tends to suit situations where multiple family members are involved and income splitting is valuable, asset protection is a high priority, or estate planning is a consideration. A simple company may be sufficient where you are the only person involved, or you plan to raise external investment.
Ready to set up your trust? eCompanies offers professionally drafted trust deeds. Visit ecompanies.com.au.
The content provided in this blog is intended solely for general information and awareness around our product offerings. It does not constitute personalised advice for any specific individual or organisation and should not be solely relied upon. All information within this blog post is generalised and does not consider the unique situations, circumstances, or requirements of any individual or organisation. Always seek professional advice and consider the suitability of the information to your specific goals and needs before taking any action based on the information presented.
