Every business, regardless of its size or scale, faces the risk of financial difficulties, which can disrupt operations. In such situations, the likelihood of asset seizure is also high. By registering a trust in Australia, you can establish a streamlined financial structure that can help protect assets and allow flexible more tax effective income distribution. It’s a smart choice that can offer valuable tax advantages, benefits for family members, and support long-term business stability.
In this blog, we’ll explore the essentials of a family trust, including its purpose, benefits, tax implications, and the step-by-step process of setting up a family trust in Australia.
What is a Family Trust in Australia—An Overview
In Australia, a family or discretionary trust is set up by the family member commonly referred to as a trustee to manage and protect assets, support beneficiaries, and gain tax benefits.
Why are Family Trusts Created?
In short, a family trust is created for safe and secure wealth planning for future generations. Imagine you run a business that may face financial challenges or get sued in the course of time. In such situations, your business, along with the assets that are under your name, can be seized by creditors, including the ATO. To reduce the chance of such situations, a family trust setup in Australia is beneficial. Under a family trust, you can achieve the following.
- Income distribution & tax benefits: A family trust in Australia allows income to be distributed among eligible beneficiaries. However, distributions to minors are subject to specific ATO rules and may attract higher tax rates on unearned income.
- Asset protection: Assets held in a family trust are legally owned by the trustee on behalf of the beneficiaries. This structure prevents direct personal ownership, offering protection from claims in events such as bankruptcy or divorce.
- Beneficiary support: With income split, equal and controlled distribution of financial support is provided to the vulnerable beneficiaries in the family, ensuring lifelong monetary aid without the risk of mismanagement.
- Business continuity: When a business is held under a family trust, it remains operational regardless of unforeseen events such as the demise of a key individual or a divorce. Since no single person holds full ownership, the business cannot be shut down or claimed entirely by any one party.
Family Trust Structure: Key Roles & Responsibilities
To register for a family trust, it is first essential to understand the members involved and their key responsibilities.
- Trustee: The legal owner of the trust who holds the key responsibility of managing the asset and distribution of the income in the best interest of the beneficiary. The trustee can either be an individual or a corporate trustee (company) who ensures the trust deeds are followed and compliant with the ATO laws.
- Beneficiaries: Typically includes family members or company associates in the event of a corporate trust. The beneficiaries do not have discretion over the distribution of the income but are eligible to receive the distribution made by the trustee.
- Appointor: A powerful member of the trust who has the authority to replace or remove the trustee if found unsuitable or not in the best interest of the family trust. An appointor also ensures the family trust in Australia is not in favor of any individual under any circumstance change.
- Settlor: Often called the creator of the trust, the settlor initiates its formation by contributing a nominal amount to the trustee. Typically, the settlor is a lawyer, accountant, or an independent third party with no control over the trust or its assets. Their primary role is to confirm the trust’s legality by signing the trust deed.
How to Set Up & Register a Family Trust in Australia
Setting up a family trust involves a series of steps, including drafting a clear trust deed, appointing the right trustee and being upfront with the roles and responsibilities of each member. Let’s explore the procedures for setting up and registering a family trust in Australia that aligns with the ATO.
- Step 1: Decide on the members & their roles
As an initial step, this helps in determining the key members and their respective roles in the family trust. For example, by deciding on the beneficiaries, the trustee, and the settlor, everyone will be clear on their roles and their contribution to the family trust. This will help prevent legal chaos and arguments.
- Step 2: Draft the trust deed
This is an important step, as this outlines the purpose of the trust, benefits of the family trust, who the beneficiaries are, how the income gets split, ways of asset protection and much more. Getting the deed drafted by a lawyer or an accountant ensures no information is overlooked.
- Step 3: Sign & settle the trust deed
Once the members are finalised and the trust deed is confirmed per the ATO rules and regulations, it’s time for the settlor to give a nominal amount and form the trust. After this, the settlor has no further involvement with the family trust.
- Step 4: Pay stamp duty
As the next step, it is necessary to register the family trust in Australia legally by paying the stamp duty per the relevant state or province. The stamp duty varies from region to region; for example, some states in Australia, such as Queensland, Tasmania, and Western Australia, do not require a stamp duty, whereas regions like New South Wales and Victoria demand a stamp duty to validate the trust deed.
- Step 5: Apply for an Australian Business Number & Tax File Number
Obtaining a TFN & ABN helps the family trust comply with the ATO tax obligations. With TFN, trustees can lodge annual tax returns and reduce higher withholding tax on trust income. Similarly, if the trust carries out a business, having an ABN allows the trust to invoice its customers, register for GST, and claim any tax credits if possible.
- Step 6: Open a bank account & complete the setup
As the final step, opening a bank account in the trust’s name is essential for managing all financial transactions. This process is straightforward with the trust deed, TFN, ABN, and other relevant trust documents. Once the account is set up, the trust can begin its operations, ensuring all financial records are maintained, tax returns are lodged annually, and income distributions are made by June 30 each year.
Benefits & Advantages of a Family Trust
Here are the key advantages of a family trust in Australia, helping families manage wealth, reduce tax liabilities, and safeguard assets for future generations.
- Tax efficiency: Income generated from investments, family businesses, or rental properties often comes with significant tax liabilities. A family trust helps reduce this burden by distributing income among multiple beneficiaries, where the entire tax responsibility is borne by each beneficiary on their allocated share.
For example, if the trust earns $120,000, a single person may owe over $30,000 in taxes. By allocating income strategically, the overall tax burden can be minimised while maximising the financial benefits of the family trust. However, income distribution must comply with ATO guidelines, and any form of artificial income splitting or aggressive tax minimisation aimed solely at reducing tax liabilities may attract scrutiny. The ATO closely monitors trust distributions, and non-compliant arrangements can result in penalties and legal consequences.
- Financial security for beneficiaries: A family trust provides lifelong financial support by ensuring that each family member receives a share of the income. This allows vulnerable beneficiaries to have financial stability without relying on others. Additionally, it simplifies financial management, reducing stress and ensuring steady support for their needs.
- Estate planning: A family trust in Australia enables a smooth and structured transfer of wealth, ensuring assets are distributed without the delays of probate. Unlike a will, a trust allows for equal and pre-defined wealth distribution, with legally binding conditions in place. This helps protect the family, maintain financial stability, and foster unity, even during challenging times.
- Asset protection: In a family trust, there is no personal ownership of assets. This plays a major role during times of divorce, bankruptcy, and family disputes. As the asset is placed out of business affairs, there is no legal claim for the asset. This helps in the prevention of the asset from being scrutinised.
Family Trust Taxation & Tax Benefits in Australia
A family trust itself is not taxed; instead, the beneficiaries who receive a share of the income are taxed on their respective portions. However, if the income is not distributed, the trust is taxed at the highest marginal tax rate.
For example, if a trust earns $100,000 and distributes it equally between two beneficiaries, each is taxed only on their $50,000 share, which is subject to a lower marginal tax rate compared to the trust’s tax rate. Thus, the tax advantage of the family trust in Australia provides long-term benefits that are effective and financially stable.
Family Trust & Capital Gains Tax (CGT) in Australia
In Australia, a family trust is subject to Capital Gains Tax (CGT) when selling or transferring assets that have appreciated in value.
- The profit gained from the selling of a family trust asset is subject to a CGT.
- The received capital gains are passed to the beneficiaries, who are then taxed on the capital gains.
- In the event of non-distribution of capital gains, the trust is subjected to a higher marginal tax rate
Capital Gains Tax (CGT) Benefits for a Family Trust
- 50% CGT discount—If a family trust holds an asset for at least 12 months before selling, it qualifies for a 50% reduction on the capital gain before distributing the profit to beneficiaries.
- Small business CGT concessions—If the trust operates a small business, it may be eligible for additional reductions or exemptions on capital gains, further lowering the tax burden.
- Wealth transfer exemptions – Some asset transfers, such as those due to death or divorce, may qualify for CGT rollover relief, allowing tax deferral. However, eligibility is limited, so professional advice is recommended.
Common Mistakes to Avoid When Setting Up a Family Trust
While a family trust in Australia offers numerous benefits, setting it up correctly helps prevent legal complications, financial setbacks, and potential family conflicts. Here are some common mistakes to avoid.
- Selecting a trustee is crucial, as they are responsible for income distribution and financial decisions. Choosing a competent and trustworthy individual helps with the smooth functioning of a family trust.
- Failing to clearly specify beneficiaries can result in legal disputes or unintended income distribution. If a beneficiary is financially irresponsible or prone to overspending, setting clear conditions in advance can help manage their share effectively and ensure the trust functions smoothly.
- Overlooking tax obligations can lead to poor tax planning, legal penalties, and higher tax liabilities. Seeking guidance from a professional accountant ensures compliance with tax laws and helps optimise the family trust tax benefits.
- Neglecting to file for a TFN and ABN can hinder the tax reporting process and the trust could face legal penalties from the ATO for non-compliance.
- Ignoring to review the trust at regular intervals can lead to financial difficulties. Keeping the trust updated ensures proper record-keeping, financial reporting, and compliance with current regulations, preventing challenges in the future.
Conclusion: Is a Family Trust Right for You?
A family trust in Australia can be a valuable tool for wealth management, income distribution, and asset protection. However, like any financial structure, it comes with challenges that must be carefully considered. Setting up, registering, and managing a family trust involves strict legal and regulatory requirements that must be followed for seamless operation. Seeking guidance from professional firms like Accountants Direct can simplify the process, providing expert assistance to minimise stress and legal complications.
If your business and family require structured wealth management, establishing a family trust can be a highly beneficial decision. Connect with our experts in person or over a call to get your questions answered and create your family trust in Australia in no time.
