A trust is a legal arrangement where a trustee holds and manages assets for the benefit of beneficiaries. In Australia, business owners use trusts, most commonly a discretionary (family) trust, to distribute income tax-effectively across a family group, protect assets from creditors, and plan succession. Set up and managed correctly, a trust remains one of the most powerful structures available for lowering tax legally.

If you are a business owner thinking about protecting your wealth and minimising tax, you have almost certainly heard the word “trust”. But there is not just one type of trust, and the way you set it up, who you appoint as trustee, and how you handle distributions each year make an enormous difference to your tax position and asset protection. This is the pillar guide to trusts in Australia. It explains every main type of trust, how bucket companies fit in, how distributions and Section 100A work, the proposed 30% trust tax, capital gains tax inside trusts, and how trusts protect assets. It also links to every detailed guide in the series.

Mina Baselyous (CPA and Chartered Tax Advisor, Registered Tax Agent) has structured trusts for Melbourne business owners for years, and Pinnacle Accounting & Advisory holds 81 five-star Google reviews. In our experience working with clients, the difference between a trust that saves tax and one that creates ATO risk is almost always in how it is managed year to year, not in the deed itself.

What Is a Trust in Australia?

A trust is a legal relationship where one person or entity, the trustee, holds and manages assets on behalf of others, the beneficiaries. A trust is not a separate legal entity in the way a company is; the trustee is the legal owner of the assets but holds them for the benefit of the beneficiaries under the terms of a trust deed.

Trusts are used in Australia for holding business assets and distributing income tax-effectively, protecting assets from creditors or personal liability, estate planning and succession, holding investments on behalf of family members, and separating the ownership of assets from those who control them. The trust deed sets out the rules, the beneficiaries, and the powers of the trustee. Getting the deed right from the start is critical, because changing it later can trigger stamp duty and other tax consequences.

The Main Types of Trusts in Australia

There are several types of trust, and the right one depends on your goals. Discretionary trusts suit family businesses and wealth building, unit trusts suit joint ventures with defined ownership, and testamentary trusts are an estate planning tool. Here is an overview of the structures most commonly used by business owners and investors in Australia.

1. Discretionary Trust (Family Trust)

A discretionary trust, also known as a family trust, is by far the most common trust structure used by small and medium business owners in Australia. The defining feature is that the trustee has full discretion over how trust income and capital is distributed among beneficiaries each year. Once the family has absorbed as much income as it can at low rates, the usual next step is a corporate beneficiary, which we cover in our complete guide to bucket companies. For an honest look at what a family trust does and does not deliver, see our guide to family trust benefits and the traps that come with them.

This flexibility is what makes discretionary trusts so powerful for tax planning. Each financial year the trustee can decide who receives income and in what amounts. If your spouse is on a lower income, they can receive a larger share. If you have adult children on lower tax rates, they can receive distributions too. This allows the family group to manage its overall tax bill in the most effective way possible.

Key features of a discretionary (family) trust:

• The trustee decides who receives income each year; beneficiaries have no fixed entitlement
• Beneficiaries are typically defined broadly (the named individual, their spouse, their children, and related entities)
• The trust can distribute to any eligible beneficiary in any proportion
• A family trust election can be made to access losses and franking credits, which restricts the family group for those purposes
• Income is generally taxed at each beneficiary’s marginal rate, making income splitting highly effective

Best for: Family groups and business owners wanting flexibility in tax planning, asset protection and long-term succession. The discretionary trust is the cornerstone of most business structuring strategies we implement at Pinnacle, and the detailed trust distribution strategies you use each year are what unlock the savings.

2. Unit Trust

A unit trust is a trust where the beneficial interest is divided into fixed units, similar to shares in a company. Each beneficiary holds a set number of units, and distributions are made proportionally based on those holdings. Unlike a discretionary trust, the trustee has no discretion over who receives what; distributions are fixed by unit ownership.

Unit trusts are commonly used in joint venture arrangements, investment structures, and commercial situations where multiple unrelated parties want a clear, documented stake in an asset or business.

• Fixed entitlements; each unitholder receives income in proportion to their units
• Units can be bought, sold or transferred subject to the trust deed
• Clear ownership structure, ideal when parties want defined interests
• Less flexible for tax planning than a discretionary trust
• More transparent and predictable, better suited to commercial arrangements between unrelated parties

Best for: Joint ventures, property investment syndications, and commercial arrangements where defined ownership interests are required.

3. Testamentary Trust

A testamentary trust is a trust created under a deceased person’s will; it comes into existence only upon death. The terms are set out in the will itself, and the trust holds assets from the deceased estate for the benefit of named beneficiaries such as a surviving spouse or minor children.

Testamentary trusts offer significant tax advantages, particularly when assets are held for minor children. Income distributed to children from a testamentary trust is taxed at adult marginal rates, not the punitive rates that normally apply to a minor’s unearned income, making them a highly effective estate planning tool. See our detailed guide to testamentary trusts in Australia.

Best for: Estate planning, particularly families with minor children or beneficiaries who need long-term asset protection.

4. Hybrid Trust

A hybrid trust combines elements of both a discretionary trust and a unit trust. It typically has two classes of beneficiaries: unit holders with fixed entitlements, and discretionary beneficiaries who receive distributions at the trustee’s discretion. Hybrid trusts were popular for several years as a way to claim deductions on funds borrowed to acquire trust units. However, the ATO has scrutinised these arrangements closely and many hybrid trust strategies have attracted adverse rulings. Specialist tax advice is essential before proceeding with a hybrid trust.

5. Fixed Trust

A fixed trust is one where the beneficial interests of each beneficiary are fixed and cannot be varied by the trustee. All beneficiaries have a defined, non-discretionary entitlement to income and capital. Fixed trusts are less common in small business contexts but appear frequently in managed investment schemes and property funds. They are also proposed to be excluded from the new 30% minimum trust tax discussed below.

6. Special Disability Trust

A special disability trust (SDT) is designed to hold assets for the benefit of a person with a severe disability. The ATO and Services Australia recognise SDTs and provide concessional treatment in means testing for government benefits. Contributions to an SDT may also attract gift and assets test concessions. This structure suits families with a member who has a severe disability who want to plan for long-term care and financial security.

Discretionary Trust vs Unit Trust: Key Differences

The two structures most commonly used by business owners are the discretionary trust and the unit trust. Here is how they compare.

Feature	Discretionary Trust	Unit Trust
Income distribution	At trustee’s discretion each year	Fixed by unit holdings
Tax flexibility	High, income split across beneficiaries	Low, distributions are proportional
Ownership clarity	No fixed interests, beneficiaries form a class	Clear, units define ownership percentage
Best use case	Family business, wealth building, tax planning	Joint ventures, commercial arrangements
Asset protection	Strong, creditors cannot attach a discretionary interest	Moderate, unit interests may be attachable

Bucket Companies: Capping Trust Tax at the Company Rate

A bucket company is a company set up to receive distributions from a family trust, so that income the trust cannot distribute tax-effectively to individuals is taxed at the company rate of 25% or 30% rather than a top marginal rate of 47%. It is one of the most common and effective tools paired with a discretionary trust for established business owners.

The reason bucket companies exist is a hard rule of trust taxation: a trust does not retain earnings at a low rate. All trust income must be distributed each year, or the trustee is taxed on the undistributed amount at 47%. Once the family members with low marginal rates have received sensible distributions, a bucket company can catch the surplus at the company rate. The retained funds inside the bucket company can then be used for investment or reinvested into the business. A holding company can sit above the structure to hold valuable assets away from trading risk.

Where the trust does not actually pay the cash across, the unpaid amount becomes an unpaid present entitlement. The Division 7A treatment of that entitlement changed in 2026. In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court held that a private company which simply does nothing about its entitlement does not provide financial accommodation under section 109D(3)(b), so the entitlement is not a loan and no deemed dividend arises from it. The ATO accepted that outcome in its Bendel Decision Impact Statement, published 26 June 2026.

That does not remove the need for active management. As at September 2026, Subdivision EA can still deem a dividend where the trust pays, lends to, or forgives a debt of a shareholder of the bucket company or their associate while the entitlement is outstanding. Section 100A still applies to reimbursement agreements. And an entitlement already converted into a complying section 109N loan remains a loan that must keep being serviced. This is exactly the kind of detail that needs attention each year, which is why we treat a trust and bucket company structure as an annual advisory job, not a set-and-forget arrangement.

Trust Distributions and Section 100A

Trust distributions are the annual decisions the trustee makes about who receives the trust’s income. To be effective, they must be resolved and documented before 30 June each year; if they are not, the trustee is taxed on the income at 47%. Getting the resolution right, and making sure the distribution is genuine, is the single most important annual task for any family trust.

Two things matter here. First, the paperwork: the trustee resolution and the supporting trust distribution minutes must be in place by 30 June. Second, the substance: the ATO uses Section 100A to attack “reimbursement agreements”, where income is distributed on paper to a low-tax beneficiary but the real benefit flows back to someone else. Since the ATO finalised its guidance, this is one of the highest-risk areas in trust taxation, and the Bendel decision made it more important still, because section 100A and Subdivision EA are now the main integrity rules operating on unpaid entitlements. Our guide to Section 100A and trust reimbursement agreements explains what is safe and what is not, and the trust distribution strategies guide shows how to distribute correctly.

In practice, says Mina Baselyous (CPA, CTA), the mistake we see most is a trust that distributes to adult children who never actually receive the money. That is precisely the pattern Section 100A targets, and it is entirely avoidable with the right approach.

The Proposed 30% Minimum Tax on Discretionary Trusts

In the 2026-27 Federal Budget, announced on 12 May 2026, the Government proposed a 30% minimum tax on the taxable income of discretionary trusts from 1 July 2028. It is not yet law. If enacted, trustees would pay at least 30% on trust income, with beneficiaries other than corporate beneficiaries receiving non-refundable credits for the tax paid by the trustee.

The proposal is significant because it would limit the benefit of distributing income to family members on low marginal rates, which is the core advantage of a discretionary trust today. The measure is proposed to exclude fixed trusts, widely held trusts, complying superannuation funds, charitable trusts, special disability trusts and deceased estates, and it would come with a time-limited three-year restructure rollover to move assets out of discretionary trusts. Our guide to the proposed 30% family trust tax explains who it really affects. You can also read the ATO summary of the proposed minimum tax on discretionary trusts. Because it is still a proposal, the right response is not to panic or unwind a trust, but to have your structure reviewed so you are ready whichever way the legislation lands.

Capital Gains Tax Inside a Trust

Trusts can access the same capital gains tax concessions as individuals, and this is one of their biggest long-term advantages. When a trust sells an asset it has held for more than 12 months, the capital gain can be distributed to individual beneficiaries who then apply the 50% CGT discount on their share. Companies do not get the 50% discount, which is a key reason many owners hold appreciating assets in a trust rather than a company.

Trusts can also access the small business CGT concessions, which can dramatically reduce or eliminate the tax on the sale of an active business asset. Depending on your circumstances, these include the 15-year exemption, the 50% active asset reduction, the retirement exemption and the rollover. When a business is eventually sold, the interaction between the trust, the concessions such as the CGT 15-year exemption and the CGT retirement exemption, and superannuation contributions is where the largest tax savings are found, and where careful advance planning matters most.

Asset Protection: What a Trust Does and Does Not Do

A properly structured discretionary trust provides strong asset protection because no beneficiary has a fixed entitlement to trust assets. If a beneficiary is sued or becomes bankrupt, their creditors generally cannot reach assets held in the trust, because the beneficiary only has a right to be considered for a distribution, not an owned interest. This is a major reason business owners hold the family home, investments and business goodwill outside their personal names.

Protection is not absolute. It depends on who controls the trust, how and when assets were transferred in (transfers made to defeat known creditors can be clawed back), and whether a corporate trustee is used. We strongly recommend a corporate trustee rather than an individual, because it provides continuity, cleaner separation, and better liability protection. For businesses that borrow inside super to buy property, a specific kind of trust applies, explained in our guide to the SMSF bare trust used in limited recourse borrowing.

Which Type of Trust Is Right for Your Business?

The right structure depends on your goals, the nature of your business, and who else is involved. Here are some common scenarios:

You are a business owner wanting tax flexibility and asset protection. A discretionary (family) trust is almost always the starting point. It gives you maximum flexibility over distributions and strong protection for business assets. For a direct comparison with incorporating, see our company vs trust guide.

You are entering a joint venture or commercial partnership. A unit trust is typically more appropriate. Each party has a clearly defined interest, which avoids disputes over entitlements down the track.

You are planning your estate. A testamentary trust should be considered as part of your will, especially with minor children or complex family circumstances.

You hold investment property with business partners. A unit trust often suits better than a company, particularly where you want to pass through the 50% CGT discount to individual unitholders subject to the trust loss rules.

In many cases business owners operate more than one trust at once, for example a discretionary trust for business income alongside a unit trust for investment property held with a partner. Your structure should be designed with your complete picture in mind, not in isolation. Trusts also sit within the broader question of which entity to trade through, covered in our complete guide to business structures in Australia.

How to Set Up a Trust in Australia

Setting up a trust in Australia involves several key steps:

1. Decide on the trust type based on your goals, choosing the most appropriate structure
2. Appoint a trustee, either an individual or a corporate trustee. We strongly recommend a corporate trustee for most business trusts for better protection and continuity
3. Prepare the trust deed, drafted by a solicitor, setting out the rules, beneficiaries, trustee powers and distribution provisions
4. Pay stamp duty where applicable; some states charge stamp duty on trust establishment and requirements vary by state
5. Apply for a Tax File Number and ABN; the trust must have its own TFN, and an ABN is required if the trust carries on an enterprise
6. Open a trust bank account; all trust transactions must flow through a separate account in the trustee’s name as trustee for the trust
7. Register for GST if required, which applies once trust turnover exceeds $75,000

As a rough guide, expect $1,500 to $3,000 or more to set up a properly structured discretionary or unit trust including the deed, trustee company and associated registrations. At Pinnacle, we coordinate the full setup process for our clients, from choosing the right structure through to ensuring everything is lodged, operational and integrated into your broader tax strategy. Our business structuring services page explains how. For the ATO’s own overview, see the ATO’s guidance on trusts.

Explore the Trusts Series

This guide is the hub for our trust content. Use these detailed guides to go deeper on the topic you need right now:

• Trust distribution strategies: how to minimise tax with a family trust
• Section 100A and trust reimbursement agreements explained
• Trust distribution minutes: why they matter
• The proposed 30% family trust minimum tax
• Family trust election and interposed entity election
• Corporate trustee vs individual trustee
• What is a testamentary trust
• Does a family trust need to register for GST on residential rent
• SMSF bare trust and limited recourse borrowing
• Buying an investment property in a trust: tax, land tax and asset protection
• Company vs trust: which structure is right
• What is a holding company and do you need one

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