A trust is a structure where a trustee carries out the business on behalf of the trust’s members (or beneficiaries). A trust is not a separate legal entity.

A trustee may be an individual or a company. The trustee is legally liable for the debts of the trust and may use its assets to meet those debts. However, if there is a shortfall the trustee is responsible for the difference.

A trust is set up through a trust deed and there are two main types: discretionary or unit trusts.

In a discretionary trust, the trustee has discretion in the distribution of funds to each beneficiary. In a unit trust, the interest in the trust is divided into units with their distribution determined by the number of units held by each member.

Advantages of a trust

  • Reduced liability especially if corporate trustee.
  • Assets are protected.
  • Flexibility of asset and income distribution.

Disadvantages of a trust

  • Can be expensive and complex to establish and administer.
  • Difficult to dissolve, dismantle, or make changes once established particularly where children are involved.
  • Any profits retained to reinvest into the business will incur penalty tax rates.
  • Can’t distribute losses, only profits.

Other factors to consider

Tax requirements

A trustee must apply for a tax file number (TFN) and lodge an annual trust return. The trust is not liable to pay tax. Instead tax is assessed to the trustee or the beneficiaries that are entitled to receive the trust net income. In rare circumstances, if the income is not fully distributed to the beneficiaries the trustee pays tax on the undistributed income at the highest marginal rate.

Visit the ATO website for more information regarding your tax obligations as a trust.