What are the tax benefits of a trust structure? 

Trusts play a crucial role in tax planning for businesses, families, and individuals, helping to minimise taxes and safeguard wealth. They are especially popular among wealthy individuals and families and serve as a key structure for business interests, encompassing investments like shares, real estate, and cryptocurrencies. Families can use these trusts to effectively handle their financial and tax matters.

However, the advantages of trusts extend beyond the wealthy; regular families and individuals can also benefit from them to optimise tax outcomes for their business and investment interests.

The challenge lies in understanding the right type of trust for specific circumstances. Different trusts operate differently, and choosing the best one depends on individual needs and desired outcomes.

To simplify this decision-making process, this post will highlight the common types of trusts in Australia. At Blackwattle Tax, we aim to empower you to make an informed choice that aligns with your tax planning strategy for your family’s business and investment interests.

What is a trust?

The Australian Tax Office (ATO) defines a trust as an arrangement where a person or company (the trustee) holds assets (trust property) in trust for the benefit of another (the beneficiary).  In simple terms, it is a legal relationship (administered by a legal document called a Trust Deed), which establishes a relationship between a party known as a Trustee, who holds assets on behalf of another party known as a Beneficiary. 

Trusts are extensively used in family and business group structures to tax plan and protect investments and business interests.  A trust is an obligation imposed on a party (person or other entity commonly a company) to hold property for the benefit of a beneficiary or beneficiaries.  Legally, a trust is a relationship, not a legal entity.  However, trusts are treated as taxpayer entities for the purposes of tax administration and must lodge an annual tax return with the ATO.

3 key terms related to trusts

Trustee: is commonly an individual or company responsible for managing the trust’s financial and tax affairs including distributing income and capital gains of the trust to the beneficiaries.  The Trustee must manage the trust assets in accordance with the terms of the Trust Deed.  Trustees are personally liable for the debts of the trust they administer.  However, the trust deed usually provides for the Trustee to be indemnified from the trust assets.  To put simply, the Trustee is responsible for the income/expenses and assets/liabilities of the trust, and it can use the trust assets to ensure those obligations are met according to the terms of the trust deed.

Beneficiary (or Beneficiaries): are the people of other entities (such as companies) that receive the financial benefit of the trust via trust distributions.  The Beneficiary, except some minors and foreign tax residents, include their share of the trust’s net income (otherwise known as trust distributions) as income in their own tax returns (i.e. the trust does not pay income tax as all profits each year are distributed or passed on to the Beneficiary or Beneficiaries.  Beneficiaries do not control the actions of the trust, however they have the power to appoint and remove the trustee according to the trust deed.

Trust Deed: is a legal agreement that sets out the terms and conditions for establishing and operating the trust.  The Trust Deed specifies the role of the trust and how the trust should operate.

Why set up a trust in Australia?

Asset protection

Trusts also offer asset protection which is the process of legally protecting your assets from creditors, lawsuits, and other types of claims.  Trust asset protection strategies work as a Beneficiary (such as a person) does not legally own the assets.  The assets are owned by the trust and therefore the asset is not the individuals to lose if they are sued.

Tax planning benefit

Specific types of trusts, Discretionary Trusts, have a tax advantage compared to other trusts.  Discretionary Trusts can distribute the trust income to multiple beneficiaries as they wish to achieve the best tax outcomes.  Hypothetically, an individual can set up a discretionary trust that holds personal assets and the beneficiaries could be the members of the immediate family.  The income and capital gains from those assets can be distributed across the family members to achieve a lower tax outcome than if the individual was taxed on all the income themselves. 

6 common types of trusts in Australia

There are several types of trusts available to use in tax planning and group structuring.  It is important to understand the key differences of the types of trusts to know which type will provide the best tax outcomes for your tax planning strategy.


Type of trust

How a trust works

Fixed Trust

Fixed Trusts involve the fixed transfer of property to beneficiaries of the trust based on predetermined percentages.  The trustee has no discretion over distributions of the fixed income to beneficiaries. 

Beneficiaries have fixed entitlements (section 272-5 of Schedule 2F to the ITAA 1936) to all income and capital distributed from the trust assets.

Unit Trusts 

Unit Trusts are types of fixed trusts where beneficiaries hold units of the trust.  A comparison is how shareholders own shares in a company.  Instead of shareholders, beneficiaries are unitholders.  Unit Trusts are typical for property investments or business joint ventures. 

Discretionary Trusts (Family Trusts)

Discretionary Trusts (Family Trusts) are the common type of trusts used by individuals and families.  Discretionary trusts are often used by families as they allow for flexible tax planning.  They are commonly used in family businesses and wealth creation strategies.  The income from a business or investment can be voluntarily distributed among family members (section 102UC(4) and section 272-5 of Schedule 2F to the ITAA 1936). 

Discretionary Trusts can also be set up as a special disability trust for the benefit (and to protect) a family member living with a disability (section 1209L of the Social Security Act 1991).  A special disability trust can be established through a Will or by a living relative to benefit a disabled family member.

Discretionary Trusts are ‘discretionary’ because the trustee exercises discretion in distributing income and assets of the trust.  No beneficiary has a fixed entitlement to the income or assets of the trust. 

Certain states in Australia, such as NSW, do not qualify for a land tax-free threshold.  This means the trust may pay a higher amount of land tax compared to other trust structures.

Hybrid Trusts

Hybrid Trusts adopt elements of fixed trusts and discretionary trusts (section 272-5 of Schedule 2F to the ITAA 1936).  The trustee has specific rights over the allocation and positioning of assets under the trust.  The trustee must adhere to specific beneficiary rights such as issuing regular entitlements in the form of special units. 

Testamentary Trusts

Testamentary Trusts are trusts that are created and come into existence when the testator dies (the person who set up the trust).  It is established through a Testamentary Trust Deed laid out in the person’s Last Will and Testament.  It is the person’s Will that dictates the terms of the trust and the conditions the income may be distributed to a beneficiary.  The Testamentary Trust can specify a minimum age the trust may be accessed by a beneficiary.

Testamentary Trusts are related to Will and Estate Planning.  They can be challenged (a legal process known as contesting the Will) by a party, or a beneficiary themselves. 

Bare Trusts

Bare Trusts are trusts where the trustee only holds the property on behalf of a beneficiary.  The trustee has no discretion or powers over the trust operation.  The trustee is only a nominee of the single beneficiary involved who dictates the terms of the trust deed.  In bare trusts, beneficiaries retain total control over the trustee.  Bare Trusts are common where the beneficiary wants to remain anonymous. 



What type of trust is best for me?

Selecting the right trust involves a thoughtful consideration of various factors to align with your specific financial goals and strategies.

Different types of trusts offer diverse mechanisms for individuals and families to define how the trusts operate and designate beneficiaries of financial benefits.

To make a well-informed choice, it’s essential to evaluate your tax planning and investment objectives. Each trust type comes with distinct advantages, encompassing tax minimization and asset protection benefits.

However, it’s equally crucial to thoroughly assess these benefits in conjunction with the limitations inherent in each trust structure.

For effective decision-making in this complex landscape, seeking professional advice is highly recommended. Consulting with a Chartered Accountant or Registered Tax Agent enables you to clearly articulate your objectives and explore trust options tailored to your specific needs. 

Registered Tax Agents and Chartered Accountants can provide valuable insights, aiding in the balanced consideration of benefits and limitations, ensuring that the selected trust aligns seamlessly with your intended purposes and financial objectives.

Ready to start setting up your trust? Reach out to the experts at Blackwattle Tax

Setting up a trust is a personalised journey, and at Blackwattle Tax, our team of professionals is dedicated to making this process smooth and tailored just for you. 

With a track record of success spanning various industries, our team of seasoned Chartered Accountants and Tax Agents is passionately dedicated to helping clients—whether individuals, families, or businesses—achieve the best financial and tax outcomes. 

Schedule a FREE 30-minute consultation today to find out how we can help you with choosing the ideal trust structure and understanding its tax benefits.

Sign up to our monthly newsletter where we share business and investment advice and tax planning strategies.