For many small and medium enterprise (SME) owners in Australia, balancing business growth with long-term asset protection and succession planning is critical. One of the most effective legal tools to support these goals is a family trust (also known as a discretionary trust).
Used widely by family businesses, investors, and private companies, a family trust can provide flexibility in income distribution, shield assets from risk, and facilitate intergenerational wealth transfer. But how is a family trust set up, and what are the real legal and commercial benefits?
This article provides a practical overview for SME owners on how to establish a family trust in Australia and highlights key benefits—along with relevant case law to illustrate how they operate in practice.
What is a Family Trust?
A family trust is a legal relationship where a trustee holds assets for the benefit of a group of beneficiaries, usually family members. The trustee has the discretion to decide how income or capital is distributed among beneficiaries each financial year.
The trust is governed by a trust deed, and is typically used to:
- Own business assets
- Manage profits from investments or trading
- Distribute income tax-effectively
- Protect assets from legal claims or family disputes
How to Establish a Family Trust
Setting up a family trust involves several steps:
- Appoint a Trustee
The trustee controls the trust. You may choose an individual (such as yourself or a spouse), or a corporate trustee, which can provide an extra level of legal protection and simplify succession if company shares are transferred. - Define the Beneficiaries
Typically, these include family members, family companies, and future descendants. The trust deed will include both specific and general classes of beneficiaries. - Engage a Lawyer to Draft the Trust Deed
This is the foundational legal document. It outlines:- The powers of the trustee
- Who the beneficiaries are
- Who the appointor is (the person who can hire and fire trustees)
- How income and capital are to be handled
- Settle the Trust
A settlor (usually an independent third party such as an accountant or solicitor) pays a nominal amount (e.g. $10) to “settle” the trust and bring it into legal existence. - Register with the ATO
Apply for a Tax File Number (TFN) and Australian Business Number (ABN) for the trust. You will also need to register for GST if the trust’s turnover exceeds $75,000. - Open a Trust Bank Account
The trust needs a dedicated bank account to receive income and pay expenses. - Transfer or Acquire Assets
Assets such as shares, business interests, or real estate may be purchased in the trust’s name or transferred from the trustee or others. Be aware of CGT and stamp duty consequences, legal advice is essential at this stage.
Benefits of a Family Trust for SME Owners
- Asset Protection
A well structured trust can protect business assets from personal creditors, lawsuits, or bankruptcy. In Richstar Enterprises Pty Ltd v Carey (No 6) [2006] FCA 814, the court considered whether a beneficiary’s interest in a discretionary trust could be subject to creditor claims. It held that a beneficiary with no fixed entitlement (as is the case with most family trusts) had no proprietary interest that could be seized.
- Income Distribution and Tax Efficiency
The trustee may distribute income to beneficiaries on lower tax rates, enabling tax-effective income splitting. However, this flexibility must be exercised carefully to comply with the ATO’s section 100A anti-avoidance rules. The High Court in Commissioner of Taxation v Bamford [2010] HCA 10 clarified the rules around income distribution and the concept of “present entitlement,” which remains a cornerstone of trust taxation.
- Succession and Estate Planning
Unlike assets held in a person’s individual name, trust held assets don’t form part of a deceased estate. This can reduce disputes and enable intergenerational control of business or investment assets. Through careful drafting of the appointor and trustee succession provisions, control can be passed without needing probate or risking family conflict.
- Continuity of Business Ownership
Many SMEs use family trusts to hold shares in their trading company. If structured well, this can:
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- Provide a stable ownership structure
- Simplify capital raising or succession
- Protect from family law or estate disputes
In Mercanti v Mercanti [2016] WASCA 206, a Western Australian case involving a family trust dispute, the court examined the scope of an appointor’s powers. It confirmed the importance of strictly following the trust deed’s rules, especially where business control and family relationships are involved.
- Privacy and Simplicity
Unlike companies, trusts are not registered with ASIC, so trust arrangements remain private. This can be important for families wishing to keep financial affairs confidential.
Important Considerations
While family trusts offer significant advantages, they also come with responsibilities:
- Annual resolutions are required to distribute income
- Accounting and compliance costs can be high
- Misuse or misunderstanding can lead to ATO audit
You should also be cautious of:
- Division 7A issues if your trust lends money to a company
- Family trust elections where losses or franking credits are involved
Conclusion
Family trusts are a versatile tool for SME owners to protect wealth, manage tax, and support long term planning. But they are not one size fits all and must be tailored to your specific business, family, and financial objectives.
Our firm regularly advises SME clients on trust structuring, governance, and dispute resolution. If you are considering setting up a family trust or reviewing an existing structure, contact our team for advice tailored to your business.
About the Author: This article has been authored by Steven Brown. Steven is a Perth lawyer and director and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.
