You have just had the conversation that most founders have at some point. Your accountant or adviser has suggested a discretionary trust for the new venture, or for restructuring the one you already run. The pitch is asset protection and tax flexibility, and it is a genuinely attractive one. But the structure you sign up to now is the structure you will live with, and the cost of changing it later is higher than most people expect. Before anyone drafts a deed, it is worth setting out plainly what a trust does not do well.
What you are actually choosing between
A trust is not a legal entity like a company. It is a relationship: a trustee holds and manages assets for the benefit of others, the beneficiaries. Small businesses in Australia mostly use two kinds. A discretionary (family) trust, where the trustee decides each year which beneficiaries receive what share of the income. Or a unit trust, where each beneficiary holds a fixed number of units and receives income in proportion to those units.
The alternative is a company, a separate legal entity owned by shareholders. There are hybrids in between: a company can act as trustee of a trust, or a trust can hold shares in an operating company. You can combine them, but each layer brings its own compliance and its own tax filings.
The question behind "should I set up a trust?" is usually narrower and more useful: do you want a structure that distributes profits flexibly each year to family members, or one built around retained earnings, shares and clean exits? That distinction drives most of the disadvantages below. It is also worth flagging what a trust cannot do. A discretionary trust does not issue shares, cannot easily retain profits without a tax penalty, and its famous flexibility is bounded by the trust deed and by tax law. Whichever structure you choose, the administration is real: a trust has its own tax file number and, if it carries on an enterprise, its own ABN, and the trustee must lodge a trust tax return every year, separate from the trustee's own return, as the ATO's guidance on trust registration makes clear.
Six things to weigh before you choose a trust
Keeping profits in the business
The first difference is what happens to the money the business makes. A company can hold onto its earnings to fund growth, buy equipment or build a buffer for lean periods. A trust generally cannot do that cheaply.
- Trust: Income must be distributed to beneficiaries each year, or the tax bill climbs steeply. If no beneficiary is made presently entitled to the income by the end of the income year, the trustee is assessed on the undistributed amount at the top marginal rate under s 99A of the Income Tax Assessment Act 1936 (Cth), with carve-outs such as deceased estates.
- Company: Earnings can be retained inside the company and taxed at the company rate, which for 2025-26 is 25% for base rate entities and 30% for others.
The mechanics matter as much as the rate. Under the ATO's rules on trustee resolutions, a resolution making beneficiaries presently entitled to trust income must be made by the end of the income year, 30 June, and some trust deeds require it even earlier. If the resolution is ineffective, because it names someone outside the beneficiary class or is made too late, the trustee can end up assessed on that income, possibly at the top rate. Streaming a capital gain to a beneficiary needs a written record within two months of year end. None of this is a problem if your bookkeeping is disciplined, but it is a recurring deadline that a company simply does not have.
The common workaround is to distribute to a corporate beneficiary, which pays tax at the company rate rather than the top personal rate. But it adds moving parts: the money often needs to flow back to the trading business, inter-entity loans need to be documented and managed, and the ATO scrutinises these arrangements. None of this is disqualifying, but it is ongoing complexity that a simple company does not have.
Who is actually in control
In a discretionary trust, beneficiaries have no entitlement to anything until the trustee resolves to distribute. Real power sits with the trustee and, in most deeds, with an appointor who can remove and replace the trustee. The three roles are worth keeping separate in your head:
- Trustee: runs the trust day to day and makes the distribution calls.
- Appointor: holds the power to remove and replace the trustee, so effective control often sits here.
- Beneficiaries: receive only what the trustee resolves to give them.
If roles are not documented, or if a founder dies, becomes incapacitated or falls out with a partner, the person you assumed was in charge may not have the authority you expected. The deed should name the appointor, deal with what happens on death or incapacity, and be kept in sync with reality as roles change. This is a governance question, not a tax question, and it is where disputes start.
Who wears the liabilities
A trust does not shield the trustee. An individual trustee is personally liable for the trust's debts and obligations, subject to a right of indemnity from the trust assets. If the trust cannot pay a supplier, a lessor or a customer, the trustee's own assets are exposed, and the indemnity only helps if the trust has enough assets to cover the claim. Your options:
- Individual trustee: simplest, but personal exposure to the trust's trading liabilities.
- Corporate trustee: a company as trustee is a separate legal entity, which helps contain personal exposure, but it adds company compliance, including ASIC registration, annual review and director duties, on top of trust administration.
- Company as the trading entity: the cleanest ring-fence, because the company owns the business and the risk sits inside it.
There is also a capacity trap that costs real money. Contracts should be executed in the trustee capacity, for example "XYZ Pty Ltd as trustee for the ABC Trust". Signing in the wrong name can create personal liability or an unenforceable contract, and it is one of the most common errors in trust-operated businesses.
Raising money and dealing with banks
Banks and investors prefer simple, familiar structures, and a discretionary trust is neither. There is no equity to sell and no share register to point to:
- Investors: usually want ordinary shares, voting rights and a clean way to exit later. A discretionary trust has no shares to offer.
- Banks: tend to lend more readily to a straightforward company with a clear ownership structure.
- Unit trusts: allow units to be transferred, but transfers can attract duty and have their own tax consequences.
A hybrid, such as a trust holding shares in an operating company, gives investors something to buy, but you are then running two structures with two sets of compliance and two tax filings. That may be worth it for family distribution flexibility; it is rarely worth it just to impress a bank.
How much the deed locks you in
The trust deed is the blueprint. It sets who the beneficiaries are, what powers the trustee has, and when the trust vests, meaning the date it must wind up and distribute its capital. If the business outgrows the deed, amendments can be costly, and if a variation is done incorrectly it can be treated as creating a new trust, sometimes called a resettlement, with capital gains tax and duty consequences that no one planned for.
Because the deed governs everything, the drafting needs to contemplate the business you plan to build, not just today's operations. A deed with a narrow beneficiary class, no succession provisions for the appointor, or powers that do not cover the trading activity you intend will create friction every year, not just at the edges. This is why the upfront cost of a well-drafted deed is usually money well spent.
Property holdings and state surcharges
If the trust holds residential property, some states impose surcharge duty or land tax surcharges where a foreign person is involved. In NSW, for example, surcharge purchaser duty applies to residential land transactions involving foreign persons, and Chapter 2A of the Duties Act 1997 (NSW) contains special rules for trusts: a foreign trustee can be liable for the surcharge, and discretionary trusts have their own provisions, including conditions around whether the deed prevents foreign persons from being beneficiaries.
The trap is the beneficiary class. A deed that sweeps in overseas relatives, or anyone who might become a foreign resident later, can create surcharge exposure the founders never anticipated. The rules differ from state to state, so the beneficiary definition needs to be reviewed against the states where the trust holds land, and against the family's actual circumstances.
How an Artificer Legal lawyer helps you choose and build the structure
The right answer turns on facts only you know: what the business does, who is involved, whether you will raise capital, whether the trust will hold property, and how you plan to exit. An Artificer Legal lawyer can work through those facts with you:
- Stress-test the assumptions: Asset protection is the usual reason people reach for a trust, but the protection depends on how the trust is run and where the liability actually sits. A lawyer can test whether a trust delivers what your adviser promised, or whether a company, or a hybrid, fits the real goal.
- Model the downside: Walk through the top-rate exposure under s 99A if distributions slip, the trustee liability if something goes wrong, and the surcharge exposure if the trust holds property in a state with foreign-person rules.
- Draft what the chosen path needs: A trust deed with clear appointor and succession provisions, a beneficiary class that will not cause tax or duty problems, and trustee powers that cover the actual trading activity. Or a company constitution, share structure and shareholders agreement if the company path wins.
- Review before you amend: If you already have a trust and the deed no longer fits, a lawyer can advise whether a proposed variation risks resettlement, and what the tax and duty consequences would be, before you change anything.
The value of that advice is not the paperwork. It is the structure decision itself, made once, correctly, with the exit in mind.
Control and exit: the questions that cost the most to get wrong
The tax differences between a trust and a company are well documented. The part founders get wrong is control and exit: who holds the appointor power, what happens when a founder dies or becomes incapacitated, and how a co-founder or investor gets in and, just as importantly, out. A trust that cannot admit a co-founder cleanly, or be wound up without a tax bill, is expensive to fix, and the fix itself may be a taxable event.
The choice comes down to what you are building. If the business will reinvest its profits, raise equity, or be sold one day, a company is usually the simpler vehicle, and you can still use a trust above it if family distribution flexibility matters. If flexible annual distributions are the point, a trust can work well, provided you accept the distribution discipline, the deed constraints and the trustee exposure, and you run the compliance on time. Whichever way you lean, get the deed or constitution drafted with the future in mind, keep roles and signatories documented, and take advice before you lock the structure in. Changing structure later is where the real cost sits.