What is a trust structure, and when is it used in business in Australia?
A trust is not an ordinary business structure
When many people first hear “trust” in the context of running a business in Australia, the first reaction is often “I don’t need anything that complicated”. For the most part that is correct — a trust is not the right structure for most new businesses.
But it is worth understanding, because some advisers will suggest a trust from the very beginning, and you need to understand enough to ask the right questions rather than simply nodding along.
What is a trust?
A trust is a legal relationship — not a legal entity in the sense that a company is. In a trust:
- The trustee is the person (or company) that holds and manages the assets
- The beneficiary is the person who receives the benefit from those assets
- The trust deed is the legal document that sets out how the trust operates
When you use a trust to run a business, the trustee is legally the one operating the business — but the profits can be distributed to beneficiaries in a flexible way.
Two common types of trust in business
Discretionary trust (family trust): The trustee has discretion to decide which beneficiaries receive a distribution of profit, and how much, each year. This is the most flexible type for tax purposes — but the ATO has complex rules on how distributions are made and who can be a beneficiary. Family trusts are often used by family businesses that want to share income among family members.
Unit trust: Profit is divided according to “units” — similar to shares in a company. Less flexible than a discretionary trust but more transparent on ownership. It is typically used when several unrelated investors want to jointly own an asset or business.
Individual trustee or corporate trustee?
A trustee can be an individual or a separate company (a corporate trustee). Using a corporate trustee — that is, setting up a company solely to act as trustee — is more common in business because:
- The trust’s assets are not affected if an individual trustee dies or loses capacity
- Changing the trustee is simpler (you change the company’s shareholders rather than having to transfer assets)
- The individual director’s liability is limited
A corporate trustee adds a layer of compliance — you have to maintain both the company and the trust.
Advantages of a trust in business
Flexible income distribution: With a discretionary trust, you can distribute profit to beneficiaries in the most tax-effective way each year — for example, distributing more to a beneficiary on a lower income.
Asset protection: Assets in a trust can be protected from some personal legal risks — but not absolutely, and it depends heavily on the structure and timing.
No fixed capital contribution: Unlike a company, you do not need to set an initial paid-up capital.
Disadvantages and limits to be aware of
Complex and costly: A trust requires a properly drafted trust deed, more complex annual compliance, and more complex accounting. The setup and ongoing costs are higher than for a sole trader and partnership, and sometimes higher than for a company.
No inherent “limited liability”: A trust on its own does not limit liability. If the trustee is an individual, that individual bears personal liability. Only when a corporate trustee is used is there a layer of protection — and even then, it is not absolute.
Losses cannot be passed out: A trust’s losses cannot be distributed to beneficiaries to reduce their personal tax. The losses are trapped in the trust until there is a profit to offset them.
The ATO watches closely: The ATO has complex rules on trusts — particularly the distributions of a discretionary trust. Failing to comply correctly can result in tax at the highest rate being applied to the entire distribution.
Is a trust the right structure for you?
A trust is best suited when: a family business wants to distribute income among several family members, needs flexibility over annual profit distribution, or wants to separate business assets from personal assets within a more complex structure.
A trust is less suitable when: you are just starting a business and need simplicity, you are the only person running it, or your business may make a loss in its early years (the losses get stuck in the trust).
A decision about a trust should be made together with an accountant and a solicitor — not based on advice from acquaintances or online forums. A trust that is set up incorrectly is very expensive to fix later.