All about trusts: family trusts, unit trusts and the catches

How a trust works

• A trust isn't a company or a person. A trustee holds the assets and runs the trust for the beneficiaries, following the rules in the trust deed.
• The trustee can be you (an individual) or a company. A company trustee usually gives better protection and makes it easier to hand over control later.
• The trust has its own ABN and TFN and lodges a tax return each year, but it usually pays no tax itself. The income is passed out to beneficiaries, who pay tax at their own rates.

The main types

• Family (discretionary) trust: each year the trustee decides which family members get the income, and how much. This is the most common type.
• Unit trust: beneficiaries own units, like shares, and get income in proportion. Suits business partners who aren't family.
• Testamentary trust: set up by your will after you die, often with tax advantages for children. Worth raising with your estate lawyer.

Why people use them

• Flexibility: income can go to family members on lower tax rates each year, as long as they really receive the benefit.
• The 50% capital gains discount passes through to individual beneficiaries (a company doesn't get it).
• Assets held in a trust aren't in your own name, which can help protect them if things go wrong.
• A company can be a beneficiary (a 'bucket company'), capping the tax on income left there at company rates.

What no one tells you

• The 30 June deadline: the trustee must decide who gets the income by 30 June every year, and record it in writing. Miss it, and the income can be taxed at the top rate or go to default beneficiaries.
• Losses stay in the trust: a trust can't pass a loss out to you, so a negatively geared property in a trust won't reduce your wage tax.
• A business loss isn't wasted, though. It's first offset against the trust's other income that year, and anything left carries forward to reduce the trust's profits in later years, before anything is distributed. To use it, the trust has to pass the 'trust loss' tests; most family trusts make a family trust election, which makes those simpler. Until the loss is used up, there's no income to distribute.
• No main residence exemption: a home owned by a trust pays capital gains tax when sold.
• Children under 18 pay penalty tax rates on trust distributions above a small amount, so 'giving income to the kids' rarely works until they're adults.
• The ATO watches who really gets the money. If income goes to a family member on paper but someone else actually uses it, it can be taxed at the top rate (section 100A).
• Money owed to a bucket company and never paid can be treated as a dividend (Division 7A), the same trap as borrowing from your own company.
• Land tax: in Queensland, trusts generally get a lower tax-free threshold for land tax than individuals ($350,000 versus $600,000).
• Paperwork every year: a separate tax return and accounts, trustee resolutions, and sometimes a family trust election, which has its own rules.
• The deed matters: old or off-the-shelf deeds can be missing powers you need. Have it checked before relying on it.
• Distributing outside the family: once a trust has made a family trust election, income paid to someone outside the family group is taxed at 47%. The ATO is currently offering to reduce interest on this tax for trustees who come forward and pay it themselves, until 30 June 2027.
• Change may be coming: the Government plans a minimum tax on family trusts from 1 July 2028. See our article on the proposed trust tax.

When a trust usually makes sense

• A profitable family business with adult family members on lower incomes.
• Holding investments outside your own name, for protection or to plan for the next generation.
• Unrelated people going into business together (a unit trust).

It's usually a poor fit for your own home, or for an investment expected to make losses for years. Every family is different, so book a consult before setting one up: changing structures later can trigger capital gains tax and stamp duty.