Should your business use a trust in Australia: the pros and cons to weigh
Your business has just posted its strongest year, and your accountant has raised the idea of moving it into a family trust before the next financial year. A neighbour runs their business through a trust, a co-founder has been reading about asset protection, and you need an answer that is better than "everyone else is doing it". At its core the decision is about how you want to take profit, what you want to protect, and who will run the business in twenty years' time.
Trust, company or partnership: the options on the table
The starting point is that a trust is not one thing, and it is not a separate legal entity. It is a relationship: a trustee holds and manages assets for the benefit of named beneficiaries, under the rules of a trust deed. The real menu for a growing Australian business is trading on as a sole trader or partnership, moving into a company, or running the business through a trust, usually with a company appointed as trustee.
Within the trust option sit two very different vehicles. A discretionary (family) trust lets the trustee decide each year how to split income and capital among a class of beneficiaries, which is why it suits family businesses. A unit trust gives investors fixed entitlements matching the units they hold, which is why unrelated investors use them. Many growing businesses end up with a hybrid, a trust holding the shares of an operating company. These choices do not collapse into one decision, so the first job is to name which one you are actually weighing.
One assumption should be corrected before the weighing starts: a trust does not give you limited liability by itself. The trustee owns the assets and is personally liable on the trust's contracts. The standard fix is a company acting as trustee, and the cost and obligations of that company are part of the real price of the trust, not an optional extra.
The factors to weigh before you switch
What happens to profit you do not hand out
The default rule for a trust is that net income is taxed to the beneficiary who is presently entitled to it in the year it is earned, under s 97 of the Income Tax Assessment Act 1936 (Cth). Income that is not distributed to a beneficiary is taxed in the trustee's hands at the top marginal rate, currently 45% plus the 2% Medicare levy, a combined 47%, under s 99A of that Act. A company, by contrast, pays 25% on the profits of a base rate entity and 30% otherwise, according to the ATO's company tax rates, so money left inside the company is taxed at roughly half the trustee rate:
- Retaining profit in a trust: taxed at about 47% in the trustee's hands, so retention is rarely sensible and the plan is to distribute everything each year.
- Retaining profit in a company: taxed at 25% to 30%, which is why companies suit businesses that reinvest most of their earnings.
This is the factor that separates the two structures most cleanly. If you plan to plough most of your profit back into inventory, equipment or people for the next few years, the company's lower rate on retained earnings is a material advantage. If you take the profit out every year anyway, the trust's distribution flexibility matters more than the retention rate.
How flexible does income splitting need to be
Inside the rules, a discretionary trust is genuinely flexible. The trustee can stream income, capital gains and franked distributions to whichever beneficiaries fit the year's circumstances, and each beneficiary is assessed on their share under s 97 of the Income Tax Assessment Act 1936 (Cth). That is the legitimate tax-planning engine that attracts most small businesses to trusts.
The flexibility has hard edges. Distributions to children under 18 are taxed at the top marginal rate once they exceed a small threshold, currently $416, under Division 6AA of the Income Tax Assessment Act 1936 (Cth), so the classic plan of splitting income to the kids usually fails on arithmetic. The anti-avoidance rule in s 100A of that Act can also unwind an entitlement where a beneficiary is made entitled to trust income but does not economically enjoy it under a reimbursement agreement, leaving the trustee to pay tax at the 47% rate. The ATO has made this a compliance focus, publishing TR 2022/4 and its compliance guideline PCG 2022/2, and the guideline is currently under review following the High Court's decision in Commissioner of Taxation v Bendel (2026):
- Streaming to a working spouse or adult children: generally legitimate, provided the trustee resolves the distribution before the end of the income year and documents it properly.
- Streaming to minors: caught by the Division 6AA penalty rates above $416.
- Arrangements where the beneficiary never receives the money: exposed to s 100A and a 47% trustee tax bill.
The practical question is whether your family actually spans different tax brackets. If it does, and you are disciplined about resolutions and records, the flexibility is real. If the only candidate beneficiaries are you, a partner on a similar income and minor children, the flexibility is worth less than it appears.
How long does the structure need to last
Trusts carry a built-in expiry date. Most Australian states impose a statutory perpetuity period of 80 years, so standard trust deeds fix a vesting date 80 years after establishment, with the Perpetuities Act 1984 (NSW) a typical example and South Australia the main exception. On vesting, the trust ends, the beneficiaries' interests become fixed and the assets must be dealt with, in circumstances the ATO says will generally involve capital gains tax consequences, a position set out in TR 2018/6. Planning for the vesting date should start decades out, not in the year it arrives.
Losses are the second time problem. If the trust trades at a loss, the loss stays inside the trust. It cannot be distributed to beneficiaries as a deduction, and the trust loss rules can stop the trust using carried-forward losses after certain changes in ownership or control, so the value of the loss can evaporate. A company that trades through bad years carries its losses forward more predictably.
Succession planning is where the trust earns its keep: control can pass to the next generation by changing the appointor or trustee under the deed, without transferring assets to individuals. But that flexibility operates inside the vesting date, and a deed with a narrow beneficiary class or restricted trustee powers will eventually need variation, which costs time and duty.
What asset protection is actually buying you
With a company as trustee, a creditor of the business generally has to pursue the trust's assets rather than your personal assets, provided the company is properly run and the trust's affairs are genuinely separate. That separation is the entire mechanism of asset protection, and it fails quietly when the lines blur:
- What weakens the protection: personal guarantees over business debts, mixing trust funds with personal money, the trustee trading while insolvent, missing minutes and distribution resolutions, and using trust assets for personal benefit.
- What the protection never covers: family law claims, guarantees you sign in your own name, and risks you should insure against regardless.
The price of the shield is a real company: ASIC registration and annual fees, a separate tax return for the trustee, and, under s 201A of the Corporations Act 2001 (Cth), at least one director ordinarily resident in Australia. If the business is a one-person operation, the corporate trustee adds a layer of cost and paperwork that a company owned directly would not have.
The annual compliance load
A trust demands attention every single year. The trustee must resolve how the year's income will be distributed before the end of the income year on 30 June, because the resolution is what makes beneficiaries presently entitled to their shares. The trust lodges its own tax return, beneficiary statements follow from that, and the bookkeeping must keep trust money separate from personal money at all times. Miss the resolution and the year's income falls into the 47% trustee rate; reconstructing informal arrangements from past years is harder than getting them right on time.
For a small business this is routinely more administration than a company with the same turnover. The trust needs its own TFN and, if it carries on an enterprise, an ABN, and the accountant's annual bill reflects the extra returns, statements and letters. None of this is prohibitive, but it is the price of the flexibility, and it is paid every year, not once.
How you plan to grow and eventually exit
On the way out, trusts have a genuine advantage: individuals and trusts can apply the 50% CGT discount to gains on assets held for at least 12 months, while companies cannot, per the ATO's CGT discount guidance. For a business that will be sold one day, holding the value in a trust that can distribute the discounted gain to individual beneficiaries can be markedly more efficient than selling from a company. The ATO notes that changes to capital gains tax announced in the 2026-27 Federal Budget do not apply to Tax Time 2026, so the future of the discount is not set in stone, but it remains available for now.
On the way in, the position reverses. Companies issue shares, run employee share schemes and take on external investors. A trust cannot issue equity; the unit trust is the closest equivalent, and it suits investors with fixed entitlements rather than employees or venture capital. That is why investor-backed ventures usually end up in a company, often with the founders' shares held by a trust.
Working with Artificer Legal on your structure decision
Most of the expensive mistakes in this area are made before the trust is ever used: a deed drafted from a template with the wrong beneficiary class, a vesting date nobody has looked at, distributions resolved after 30 June, or a s 100A exposure sitting in tax returns from three years ago. An Artificer Legal practitioner would start by stress-testing the assumptions behind the choice, modelling the downside of each structure against your actual profit, risk and succession plans, and reviewing any existing deed for its vesting date, powers and distribution history before you commit. If a trust is the right call, we draft the deed, the corporate trustee's constitution and any unitholders agreement, and coordinate with your accountant on the distribution calendar so the structure is compliant from its first year of operation.
The 30 June resolution nobody wants to miss
If one point deserves to survive this article, it is that a trust only pays for itself if you actually run it. The annual distribution is the whole machine: the trustee resolves the year's income before 30 June, the beneficiaries are assessed on their shares, and the trust's tax bill is whatever the family's brackets produce. Skip the resolution and the fallback is roughly 47% of the trust's income, plus the compounding cost of unpicking years of informal arrangements when the ATO or a lender looks closely.
None of this is an argument against trusts, and several factors cut the other way: streaming income across family members, the 50% CGT discount on a future sale, and succession through the deed rather than through asset transfers. The decision is a trade-off between the company's cheap retained earnings and simple capital raising, and the trust's distribution flexibility and conditional asset protection, all running against a hard vesting date. Structure should follow strategy, so settle first on how you will take profit, how long the structure must last and who will run the business after you, then have a lawyer and an accountant build the vehicle that matches.