You may have heard that wealthy Australians use trusts to pay less tax. This is broadly true — but the details matter significantly. Trusts are not a shortcut or a loophole; they are a legitimate structure that, when used correctly, can produce meaningful tax savings and asset protection. When used incorrectly — or set up without proper advice — they create compliance risks and potential penalties. This guide explains how a family discretionary trust works, when it makes sense, and the key rules you must follow.
Overview
What Is a Trust?
A discretionary trust is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries. The trustee has discretion each year to decide how to distribute income among the beneficiaries — which is where the tax benefit lies.
- Assets legally belong to the trust, not to you personally
- Income can be distributed each year to the beneficiary with the lowest marginal tax rate
- Beneficiaries can include a spouse, parents, adult children, or a corporate beneficiary (a company)
How Income Splitting Saves Tax
The tax benefit of a trust comes from income splitting. In Australia, each individual has their own tax-free threshold and progressive rate bands. By distributing business or investment income across multiple lower-income family members, the overall family tax bill can be significantly reduced.
Income Splitting Example
Example: Business earns $300,000. If all income is taxed in one person's name at 45% rate on the top portion, total tax exceeds $100,000.
With a trust: distribute $80,000 to a lower-income spouse (rate ~19%), $60,000 to a parent (rate ~19%), retain some in a corporate beneficiary (25%).
Total tax on the same $300,000 can be reduced by $20,000–$40,000 per year, depending on each beneficiary's other income.
The trust does not create income — it redirects existing income to lower-taxed individuals.
CGT Discount Through a Trust
If a trust holds an investment (property, shares) for more than 12 months and then sells it, the trust qualifies for the 50% CGT discount on the gain. The discounted capital gain can then be distributed to beneficiaries with low taxable income — dramatically reducing the effective tax rate on that gain.
Asset Protection
Because assets inside a trust are legally owned by the trust (not by you personally), they are generally protected from claims against you individually. This is particularly valuable for business owners, professionals with liability exposure, and anyone who has accumulated significant assets.
Critical Rules: What Can Go Wrong
NSW and Victoria impose higher land tax rates on properties held in trusts (often with no tax-free threshold, at 1.6% per year). For investment properties, land tax must be factored into the cost-benefit analysis.
Trusts must make income distribution resolutions by 30 June each year. Missing this deadline has severe tax consequences — all undistributed income is taxed at the top rate of 47%.
The ATO's PCG 2025/5 guideline identifies high-risk trust arrangements, including those set up primarily for tax avoidance. A trust must have genuine commercial purpose.
Setting up a trust without professional legal and tax advice is strongly discouraged.
Who Should Consider a Trust?
Trust Suitability Checklist
Combined family income above $150,000, with meaningful differences in each member's tax rate
Business owners generating consistent profit who want to distribute income tax-efficiently across family
Investors with significant capital assets (shares, property, commercial interests) who want CGT planning flexibility
Anyone who wants a structural separation between operating business risk and accumulated personal wealth
A trust typically costs $2,000–$3,000 to establish (legal drafting and registration) and $1,500–$2,500 per year to maintain (trust tax return and trustee minutes). These costs need to be weighed against the annual tax saving. At a combined family income of $150,000–$200,000+, the saving typically exceeds the cost.
General information only
This article provides general tax information only and does not constitute personal tax, legal, or financial advice. Tax rules can change and individual circumstances vary.
If you would like advice based on your situation, please get in touch with the practice.
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