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A family trust can be one of the most effective structures in Australia for splitting income, protecting assets and passing wealth between generations. It can also land you with a tax bill at the top marginal rate if you get the distributions wrong, and the ATO is now looking closely at exactly the arrangements many families assumed were normal. Here is how family trusts actually work, where the real benefits are, and the traps worth understanding before you set one up.
What is a family trust, and what a “trust fund” really means in Australia
A family trust is a legal arrangement where a trustee holds and manages assets for the benefit of a group of people, usually a family. In Australia it is almost always a discretionary trust, which means the trustee has discretion each year over how income and capital are distributed among the beneficiaries. The trust itself is not a person and, in most cases, pays no tax of its own, because its income flows through to the beneficiaries who receive it. The ATO’s overview of how trusts are taxed is the authoritative starting point.
When Australians talk about a “trust fund”, this discretionary family trust is usually what they mean. It is not a pot of money locked away for a child. It is a flexible structure for holding investments, a business, or property, with the tax treatment decided by who the income is distributed to each year.
“Living trust” versus “family trust”: clearing up the confusion
If you have searched for a “living trust in Australia”, you have probably run into American content. A living trust is a United States estate-planning tool, typically revocable, used mainly to avoid probate. It is not how things work here, and the distinction matters for tax. An Australian family trust is generally a discretionary trust established while you are alive, used for tax planning and asset protection. Unlike the US-style revocable living trust, the trustee’s powers and the beneficiaries’ rights are governed by the trust deed and Australian trust law. A revocable arrangement where you keep full control and benefit gives you no tax advantage in Australia, because the income is simply taxed back to you. If a website is telling you to set up a “revocable living trust” to save tax in Australia, it is describing the wrong country’s system.
The key roles: settlor, trustee, appointor and beneficiaries
Four roles make a family trust work. The settlor establishes the trust with a nominal sum and then steps away, usually never involved again. The trustee, who can be an individual or, more commonly for asset protection, a company, holds the assets and makes the distribution decisions. The appointor, sometimes called the principal, holds the real power: the ability to hire and fire the trustee, which is why who you name as appointor is one of the most important decisions in the whole structure. The beneficiaries are the family members and related entities who can receive distributions. Choosing a corporate trustee costs a little more to set up and maintain, but it separates the trust’s assets cleanly from any individual’s, which is usually the point.
The tax benefits, done properly
Income splitting and streaming
The headline benefit is flexibility. Because the trustee decides each year who receives the income, a family can distribute to the beneficiaries on lower marginal tax rates, reducing the total tax the family pays. A trust can also stream particular types of income, such as franked dividends or capital gains, to the beneficiaries best placed to use them. This is legitimate and common, but it has firm limits, which is where most of the trouble starts.
The 50% CGT discount, and why it must reach the right beneficiary
Under current law, a family trust that sells an asset it has held for more than 12 months can access the 50% CGT discount, and the discounted gain is then streamed to beneficiaries. There is a catch worth knowing: the discount is preserved only for beneficiaries who can use it, such as individuals. Stream a discounted capital gain to a company beneficiary and the company cannot apply the 50% discount, so the benefit is lost. Matching the right gain to the right beneficiary is exactly the kind of detail that makes trust distributions worth planning rather than guessing.
Franking credits and the family trust election
If your trust holds shares, franking credits can be valuable, but a discretionary trust normally has to satisfy a holding-period rule before its beneficiaries can claim them. Making a family trust election can let the trust satisfy that rule and pass the credits through. The trade-off is real: an election locks distributions to a defined family group, and distributing outside that group triggers family trust distribution tax at the top marginal rate plus Medicare levy, with no time limit on when the ATO can assess it. The ATO explains the interaction between non-widely-held trusts and franking credits, and it is a decision to make with advice, not on a whim.
The catches most people miss
Undistributed income is taxed at the top rate
A discretionary trust is designed to distribute all its income each year. Any income the trustee does not distribute is generally taxed in the trustee’s hands at the top marginal rate. Forget to make your distribution decisions before 30 June and you can hand the ATO 45% of income that a family member could have received at a far lower rate.
Distributions to children carry penalty rates
Distributing to minors is not the loophole it might seem. Income distributed to a beneficiary under 18 is taxed at special penalty rates for minors: nil on the first $416, then a high rate on income above that, reaching the top marginal rate quickly. The rules exist specifically to stop families sheltering income in children’s names.
Losses are trapped in the trust
If your trust makes a loss, you generally cannot distribute that loss to beneficiaries to offset their other income the way a negatively geared investment in your personal name might. The loss remains within the trust and is typically carried forward to offset future trust income, subject to the trust-loss rules. That does not mean a trust is always the wrong structure for a loss-making investment. The way assets, businesses and investments are structured across a family group can have a significant impact on both current cash flow and future tax outcomes, which is why we focus on getting the structure right from the beginning. Through our business and trust structuring service, we model different ownership options before assets are acquired, helping clients balance asset protection, tax efficiency and long-term flexibility rather than looking at a single trust in isolation.
ATO scrutiny: section 100A and distributions to adult children
This is the area to understand before you set up a trust, because it is where the ATO’s attention has moved. Section 100A is an anti-avoidance rule aimed at what it calls reimbursement agreements: broadly, where a beneficiary is made presently entitled to trust income but the economic benefit of that income goes to someone else, and a purpose of the arrangement is paying less tax. Where it applies, the trust reimbursement agreement rules treat the beneficiary as never entitled and tax the trustee at the top marginal rate, and critically, there is no four-year time limit on the ATO going back to do it.
The classic arrangement in the firing line is the adult-child distribution. A family distributes trust income to a university-age son or daughter who pays little tax, but the parents keep or use the money. The ATO set out its risk framework in its compliance guideline PCG 2022/2, which sorts arrangements into low-risk and high-risk zones. Broadly, if the adult child genuinely receives and enjoys their own distribution, spends it, saves it, pays their own university fees or board, the arrangement sits in the low-risk zone. If the distribution is really used to repay the parents for the child’s own upbringing, or is paid straight into a parent’s mortgage or offset account, it moves into the high-risk zone. The line is whether the person entitled to the money actually gets the benefit of it.
None of this makes family trusts bad, or the adult-child distribution automatically wrong. It means the paperwork and the reality now have to line up, and the distribution decisions need to be documented properly before year end. That discipline is a large part of what a trust accountant does for you.
What it costs and how to set one up
Setting up a family trust involves preparing a trust deed, deciding on an individual or corporate trustee, appointing the settlor and appointor, registering the trust for a tax file number and an ABN if required, and, in some states, paying stamp duty on the deed. Costs vary with the trustee structure you choose and the state you are in, and there are ongoing annual costs for accounting, the trust tax return and keeping the distribution resolutions in order. A trust is not a set-and-forget structure. The real ongoing work is the yearly discipline of deciding and documenting distributions before 30 June, which is precisely where trusts either save tax or create it. We handle both the establishment and the annual compliance through our business and trust structuring service.
Trust versus company for asset protection
People often weigh a family trust against a company. A company offers limited liability and a flat tax rate, which suits a trading business retaining profits. A trust offers distribution flexibility and, under current law, access to the capital gains tax discount, which suits holding appreciating investments, though the CGT discount is one of the measures proposed to change from 1 July 2027 (see below). Many family groups end up using both, with a trust holding the investments and a company acting as trustee or as a beneficiary to cap tax on retained income. The right combination depends on what you are holding, your risk, and your family’s income mix, which is a conversation worth having before anything is signed.
Proposed 2026-27 Budget changes to watch
This guide reflects the law as it stands in August 2026. In the 2026-27 Federal Budget the Government announced proposed reforms that, if legislated, would affect some of the tax outcomes above. The most relevant for trusts is capital gains tax: the 50% CGT discount is proposed to be replaced with cost base indexation and a minimum tax on net capital gains from 1 July 2027, which would change the maths on streaming discounted gains through a trust. Related changes to negative gearing on established residential property were also announced. Because a trust is a long-term structure, it is worth planning with these proposals in mind rather than on the current rules alone. They remain announcements and are subject to the passage of legislation, so the current rules continue to apply until any changes take effect, and we will keep your structure under review as the detail is confirmed.
Frequently Asked Questions
Is a family trust the same as a will or estate plan?
No. A family trust is a structure for holding and distributing assets during your life and beyond, while a will directs assets you own personally when you die. Assets held in a trust do not pass under your will, because the trust already owns them. The two work together, and a good estate plan considers both.
Can a family trust protect my assets from creditors?
It can help, because assets held by the trustee are generally not owned by you personally, so they are harder for a personal creditor to reach. It is not absolute, and transferring assets into a trust to defeat known creditors can be unwound. Asset protection works best when the structure is set up early, for the right reasons, and run properly.
Do I still need to distribute income if the trust made a loss?
If the trust made a loss there is no income to distribute, and the loss is generally carried forward within the trust. But if the trust has any net income at all, the trustee needs to decide and document distributions before 30 June, or that income risks being taxed at the top marginal rate.
Is it too late to set up a trust for this financial year?
Not necessarily. The tax benefits for a given financial year depend on the trust existing and making valid distribution decisions before that year’s 30 June, so the earlier in the year it is set up, the more it can do for that year. If a trust is on your mind, it is worth planning the timing with us rather than leaving it to the final weeks of the year.
General information disclaimer
This article contains general information only and should not be relied upon as taxation, accounting, legal, investment or financial advice. It does not take into account your personal circumstances, objectives or needs. Trust law, taxation legislation and ATO guidance change regularly. Before establishing, varying or distributing through a trust, seek advice from a registered tax agent, lawyer or other appropriately qualified adviser.
Thinking about a family trust, or wondering whether yours still stacks up under the ATO’s current approach? Book a consultation with Crest Accountants on 07 5538 0999 or send an enquiry through our contact form.
