Guide for Discretionary (Family) Trusts in Australia

In Australia, a Family Trust is a commonly used legal and financial structure for asset protection, tax planning and intergenerational wealth transfer. While the structure provides flexibility and several legal benefits, many individuals misunderstand its nature and misapply it, leading to unnecessary legal or tax risks.

This article outlines four common misconceptions about family trusts in Australia, aiming to clarify how this legal tool should be used lawfully and effectively.

What is a Discretionary (Family) Trust?

A family trust is a legal structure where one or more Appointers establish the trust and appoint a Trustee (which can be an individual or a corporate entity) to manage trust assets under the terms of a Trust Deed. The income generated from the trust is distributed to nominated Beneficiaries upon Trustee’s discretion.

Typical purposes of setting up a family trust include:

Allocating income efficiently to family members to reduce overall tax liability;
Separating personal assets from business risks for asset protection;
Serving as a holding vehicle for shares or business interests;
Facilitating intergenerational wealth management and succession planning.

Note: While a trust is not a separate legal entity like a company, it must still register for a Tax File Number (TFN) and Australian Business Number (ABN) and comply with relevant tax reporting obligations.

Misconception 1: Family Trusts Are a Way to Completely Avoid Tax

While family trusts offer tax planning benefits, particularly through income distribution to lower-taxed family members, they do not provide complete tax exemption or allow unlawful tax avoidance.

Key limitations include:

Placing residential property under a family trust may disqualify the owner from first home buyer grants or stamp duty concessions;
Losses incurred by the trust cannot be distributed to offset personal income of other family members;
Income distribution must be consistent with the trust deed and comply with annual tax lodgement requirements.

Misconception 2: A Family Trust Is Legally Equivalent to a Company

Although a corporate trustee can be appointed to manage a family trust, a trust is not a company and should not be treated as such. They differ significantly in legal standing, liability and tax treatment.

Key differences:

A company acting as trustee derives its authority from the trust deed, not from its company constitution;
Trust assets do not form part of the company’s property;
While corporate trustees can limit personal liability, the legal responsibilities of the trust still require careful management.

Misconception 3: Assets in a Family Trust Are Immune from Family Law Property Division

Some clients assume placing assets in a trust will shield them from property division during a marriage breakdown. However, Australian Family Law takes a substance-over-form approach.

Under Section 90AE of the Family Law Act 1975, the court can order a third party—including a trustee—to transfer or deal with trust property in order to implement a property settlement. The court will consider:

Who controls the trust;
The purpose of the trust;
The origin of the trust’s assets.

If it finds that a party effectively controls the trust or uses it for personal benefit, the assets may be included in the marital asset pool.

Misconception 4: The More Beneficiaries, the Better for Income Distribution and Tax Benefits

Some clients attempt to list a large number of beneficiaries—including non-resident relatives—to maximise income splitting. However, this can lead to unintended tax consequences.

Income distributed to non-resident beneficiaries is generally taxed at least 30%, without the benefit of tax-free thresholds. In some cases, this may result in a higher effective tax rate than distributing income to resident high-income earners.

Legal Guidance: A Family Trust Is Not a One-Size-Fits-All Solution

Establishing and managing a family trust involves complex legal, tax and regulatory considerations. The trust deed must be precisely drafted, and the roles of trustees and beneficiaries must be clearly defined to avoid legal risks exposure.

We strongly recommend that individuals seek professional legal advice before setting up a family trust, particularly in the context of asset protection, investment structuring or tax planning.

Contact Brightstone Legal’s Business Law and Tax Law Team

At Brightstone Legal, our commercial law team and tax team have extensive experience assisting clients with the establishment and management of compliant family trusts in Australia. We provide end-to-end services, from structuring advice, deed drafting to tax compliance and trust administration.

If you are considering setting up a family trust or would like tailored legal advice, please contact us for a confidential consultation.

Family Trust FAQ

Can a family trust help me avoid paying tax entirely?

No. While a family trust can assist with tax planning by distributing income to beneficiaries with lower tax rates, it cannot eliminate tax obligations altogether. All distributions must comply with the trust deed and Australian tax laws. Improper use for tax avoidance may lead to legal consequences.

What’s the difference between a family trust and a company?

A family trust is not a company structure. Although a company may act as the trustee, trusts and companies differ in legal status, tax treatment and asset ownership. Trust assets are not company assets, and the corporate trustee’s powers derive from the trust deed, not the company constitution.

Can placing assets in a family trust protect them from family law property division?

Not necessarily. Under Section 90AE of the Family Law Act 1975, courts may include trust assets in a property settlement if a party is found to control the trust or use it for personal benefit. Substance-over-form is the guiding principle in such evaluations.

Is it better to have as many beneficiaries as possible, including overseas relatives?

Not always. Including non-resident beneficiaries can trigger a minimum 30% tax rate on distributed income, without tax-free thresholds. In some cases, this results in a higher effective tax rate than distributing to high-income Australian residents.

Is a family trust suitable for everyone?

No. A family trust is not a one-size-fits-all solution. Due to its legal and tax complexities, it’s important to seek professional legal advice before deciding to use a family trust, especially for asset protection, tax planning or investment purposes.