A family trust is one of the most powerful tools for protecting wealth, managing taxes effectively, and securing financial stability for future generations. Without proper tax planning, you could lose up to 47% of your business profits in tax. So, whether you’re running a family business, investing in property, or looking to safeguard your assets, a well-structured trust can offer significant advantages.
But how exactly does a family trust in Australia work? What are the tax benefits? And how can you ensure your trust is set up to maximise financial protection while staying compliant with tax laws?
At Liston Newton Advisory, we help business owners and families make informed financial decisions. In this guide, our tax accountants break down everything you need to know about family trusts — from how they operate and their tax benefits to key rules around distributions and capital gains tax.
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The types of family trusts
There are two common types of family trust structures. This article primarily focuses on discretionary trusts — as they are the most common structure for tax planning and asset protection.
What is a family trust?
A family trust is a smart way to manage and protect your family's assets while making sure your wealth is structured tax-effectively. If you're running a business, growing your investments, or planning for the future, a family trust can help you distribute income, reduce tax, and safeguard what you've built for generations to come.
At its core, a family trust is a legal structure that holds assets on behalf of your family members. A trustee — which can be you, another family member, or a company — manages these assets and decides how much income is distributed and to whom. To ensure the trust is genuinely controlled by a single family group, the ATO applies the family control test, which examines who makes key decisions about trust assets and distributions.
Family trusts also offer asset protection. Because the trust — not you personally — owns the assets, they’re generally protected from creditors, legal claims, and financial risks. If you're running a business, this can be invaluable in separating your personal wealth from potential liabilities.
We often recommend family trusts for:
- Minimising tax by distributing the income of the trust among members of the family in lower tax brackets.
- Protecting family assets from financial risks, lawsuits, or business insolvency.
- Long-term wealth planning to ensure your children and future generations are financially secure.
Please see below an example of a family trust structure with a corporate trustee:
So, should you set up a family trust? It takes planning, but when done right, it can be one of the most effective tools for managing your family's wealth. If you're considering whether a family trust is right for you, we can help you navigate the process and tailor a strategy that suits your needs.
Unit/fixed trust
Also known as a fixed trust, a unit trust operates slightly differently from a discretionary trust. Within this structure, the profits are divided depending on the fixed ownership percentages stipulated in the unit trust agreement when the entity is set up. A unit trust allows for more than one family group to be involved in the fund.
Below is an example of a unit trust structure with a corporate trustee:
What are the tax benefits of a family trust?
The advantages of a family trust include strategic income distribution, reduced tax liability, and asset protection. In some cases, a family trust may also qualify for a tax concession, such as small business CGT relief or other government incentives, depending on eligibility criteria. Unlike a company, a trust itself does not pay tax — beneficiaries are taxed at their individual rates, allowing for potential tax savings when income is allocated effectively.
However, contributions to a family trust are generally not tax-deductible. Unlike superannuation contributions, which can be claimed as deductions, transferring money or assets into a family trust is considered a private transaction. That said, once assets are inside the trust, they can be managed in a tax-effective way — distributing income to beneficiaries in lower tax brackets and reducing the overall tax obligation.
Below, we explore the key tax advantages of setting up a family trust.
Protect company assets
A key family trust tax benefit is that the fund owns all assets it gets assigned. If you then nominate a company as the trustee, this effectively shields those assets from liability and works to protect your family's assets.
Protect family investments
Another significant tax benefit of a family trust is that it can act as a holding structure for your family investments, helping to protect them from legal or financial liability.
Create a family income
If you run a growing family business, a family trust can be a robust way to look after your family and secure your assets. You can assign your family members as beneficiaries of the trust, allowing them to receive income and taxable profits directly from it.
Protect your children’s inheritance
While Australia does not levy an inheritance tax, a family trust can protect its capital from capital gains and income taxes. This will allow you to distribute a greater amount of your wealth to your children.
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Book a free family trust strategy session
A 90-minute strategy session gives you a clear plan for setting up and managing your family trust.
- Get a better understanding of how a family trust fits your goals.
- Receive a detailed report outlining tax benefits and asset protection strategies.
- Understand your next steps to maximise tax savings and secure your family’s wealth.
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Tax rates for a family trust
A family trust typically pays zero tax on income inside the trust. Instead, the income is distributed to the beneficiaries, who are taxed at their personal tax rates. However, a family trust cannot distribute a tax loss to beneficiaries. If a trust incurs a tax loss, it must be carried forward within the trust and offset against future income rather than passed on.
The trustee of the fund decides who within the family receives the distributions. They are free to distribute the income to as many beneficiaries as they see fit. You can always check your trust deed to determine the eligible beneficiaries included.
Making the correct calculations when distributing the trust's net profit will enable the family to take advantage of each beneficiary’s personal tax rates. The only instance in which a family trust does pay tax is if the income isn't distributed to its beneficiaries. In this case, the trust is taxed at the highest marginal tax rate (47%).
Do beneficiaries pay capital gains tax on the sale of property in a trust?
Family trusts do pay capital gains tax, but the tax is passed on to beneficiaries rather than the trust itself. When a trust sells a property, the capital gain is included in the trust’s assessable income. If the property has been held for more than 12 months, the trust may apply a 50% CGT discount, reducing the taxable amount before it is distributed.
Since the trust does not directly pay tax on behalf of the establishing individual’s family group, capital gains are distributed to the beneficiaries of a family trust, who then pay capital gains tax at their personal tax rates. If the gain is not distributed, however, the trust will be taxed at the highest marginal tax rate of 47%. By planning distributions carefully, trustees can reduce the overall CGT burden for the family.
Example of family trust tax benefits
A sole trader earns $200k profit from their business and, therefore, receives all the income themselves. This results in an estimated $65k in tax payable to the business owner.
But say the same business operates as a family trust, using the example of a mum and dad business with an adult child working in the business. The business owner/s can now split their income among their family members instead of it being taxed in one person's name. If split equally, each family member would receive approximately $66.6k each. As each family member is taxed at their individual tax rates on this distribution, the combined tax payable would reduce to approximately $40k in total. This is a tax saving of $27k each year.
How is a family trust taxed?
Family trusts are taxed differently from companies or sole traders because they don’t pay tax directly. Instead, all income — including business profits, investment returns, and capital gains — is distributed to beneficiaries, who are taxed at their personal tax rates. This structure allows for tax minimisation by allocating income to family members in lower tax brackets, effectively reducing the total tax burden.
However, if a family trust does not distribute all of its income, it is taxed at the highest marginal tax rate of 47%. To optimise tax efficiency, trustees must ensure income is allocated appropriately each financial year.
To access certain tax benefits, such as franking credits and trust loss rules, a family trust election must be lodged with the ATO. This election formally designates the trust as a family trust for taxation purposes and places restrictions on distributions to maintain compliance.
When managing the trust generally, trustees must ensure compliance with the trust deed, adhere to tax regulations, and distribute income correctly to maintain the trust’s legal standing and tax benefits.
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Thinking about changing from a sole trader into a trust? Find out what you need to know.
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The non-resident beneficiary tax
The trustee of the trust is liable to pay the taxes of any beneficiary who is not an Australian resident for tax purposes.
The minor beneficiary tax
While minors can be listed as family trust beneficiaries, this tax discourages the practice. Beneficiaries under 18 can receive a maximum of $416 from the trust; any gain higher than that is taxed at the top marginal rate of 47%.
The undistributed trust income tax
All income in the family trust must be distributed to the nominated beneficiaries. If it is not, the trustee will be liable to pay tax on the remaining income at the top marginal tax rate of 47%.
The family trust distribution tax
A family trust distribution tax is placed on any individual outside the trust’s listed beneficiaries.
Family trusts are set up to distribute capital to a nominated list of family members. Suppose the trustee chooses to distribute money to a party not included among the trust’s beneficiaries. In that case, the trustee will have to pay tax on the value of that distribution. This is called the family trust distribution tax.
The family trust distribution tax rate is set at the top personal marginal tax rate, plus the Medicare levy. At the time of writing, the family trust distribution tax rate can amount to 47%.
What are the set-up costs for a family trust?
Establishing a family trust typically costs between $1,500 and $2,500 + GST.
This includes:
- Creation of the trust deed.
- Advice on who should be nominated as the trustee, appointor, and settlor.
- Advice on who the beneficiaries should be.
- Registration of its tax file number with the ATO.
- Registration of an ABN and GST (if needed).
- Collating a bank account kit that allows you to simply have a new account set up for this entity upon its successful creation.
How are franked distributions taxed in a family trust?
As outlined by the ATO, franked distributions can be included in the family trust's net income and distributed to its beneficiaries for tax purposes.
However, unlike regular business income, the allocations for these amounts must be formally detailed in the trust deed. The trust deed can also prevent beneficiaries from receiving franked distributions.
Where no beneficiary is appointed, the franked distribution is taxed proportionately between the beneficiaries based on their usual entitlement to the trust’s income.
If a beneficiary qualifies for a franking credit offset, they are required to include this amount in their assessable income.
Do family trusts pay land tax?
Land held within fixed, discretionary, or unit family trusts is subject to surcharge rates, and trustees are liable to pay these rates.
Each Australian state has its own laws regarding family trust land tax. These regulations can be complex to navigate, but your Liston Newton advisor can help you untangle them.
Does a family trust file a tax return?
Trustees are required to lodge income tax returns for their family trusts, and these returns are separate from their individual or corporate tax obligations.
If you’re looking for a structure that provides tax-effective planning and a higher level of asset protection for your family and business, a family trust might be the right solution for you.
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Download our tax minimisation guide
This guide could help reduce your tax bill and improve your financial position
Inside you’ll find practical strategies and essential information to help you minimise tax legally and effectively—whether you're an individual, investor or business owner.
- Understanding legitimate tax deductions and offsets
- How to structure your business to reduce tax
- The benefits of super contributions and trust structures
- Tax-effective investment strategies
- Common tax traps and how to avoid them
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Your next steps
If you're considering setting up a family trust, it’s worth speaking with our business accountants. We’d love to have you over for a coffee at our offices in Melbourne, or Port Macquarie, or the Gold Coast. If an in-person consultation doesn’t work for you, then we’ll be glad to set up a virtual meeting.
