Discretionary Trusts In Australia: How They Work And When Businesses Should Use Them

Choosing the right business structure can be one of the biggest “set up decisions” you’ll make - and it can affect everything from your tax position to your risk exposure, and even how easily you can bring family members into the business.

If you’ve been researching structures, you’ve probably come across discretionary trusts in Australia (often called “family trusts”). They’re common in Australia, but they can also feel confusing at first - especially if you’re comparing them to a company, partnership, or sole trader set-up.

In this guide, we’ll walk you through what a discretionary trust is in Australia, how it works in practice (particularly for small businesses), what a discretionary trading trust is, and when using one might make sense for your business.

What Is A Discretionary Trust In Australia?

A discretionary trust is a legal relationship where one person or entity (the trustee) holds and manages assets for the benefit of others (the beneficiaries).

What makes it “discretionary” is the key feature: the trustee generally has discretion to decide which beneficiaries receive trust income and/or capital, and how much each beneficiary receives - within the rules set by the trust deed.

In plain terms, when people talk about discretionary trusts in Australia, they’re usually referring to a structure used to:

• run a business (a “trading trust”);
• hold business assets (like equipment, IP, or shares in a company); and/or
• distribute income to beneficiaries in a flexible way (often family members).

Who’s Involved In A Discretionary Trust?

Most discretionary trusts in Australia have a few core roles:

• Trustee: the legal owner of the trust assets. The trustee runs the trust and makes distribution decisions.
• Beneficiaries: the people (or entities) who can benefit from the trust (for example, family members, companies, or other trusts).
• Settlor: the person who “sets up” the trust by contributing a nominal amount (often $10). In many situations, the settlor should not be a beneficiary.
• Appointor (or Principal): often the person with the power to hire and fire the trustee. This can be an important control mechanism.

The rules for all of this are set out in the trust deed, which is the primary legal document for a discretionary trust.

Is A Discretionary Trust A Separate Legal Entity?

This point trips up a lot of business owners.

A trust itself is not a separate legal entity in the same way a company is. The trustee is the party that actually enters into contracts, owns assets, and is responsible for the trust’s obligations (subject to the trust deed and relevant laws).

This is one of the reasons why choosing the right trustee (and documenting everything properly) is so important.

How Does A Discretionary Trust Work For Small Businesses?

If you’re running a business using a discretionary trust structure, the trust is the “framework” and the trustee is the one doing the legal action - signing contracts, holding assets, receiving revenue, and paying expenses.

At the end of the financial year, the trustee typically decides how to distribute the trust’s net income among beneficiaries (again, as permitted by the deed and tax rules).

Trustee Options: Individual Trustee vs Corporate Trustee

In practice, trustees are usually either:

• an individual (for example, you personally); or
• a company (a “corporate trustee”).

Many small businesses prefer a corporate trustee because it can help with:

• succession and continuity (directors can change without changing ownership of assets);
• admin (often easier to manage control changes); and
• risk management (although you still need to understand personal guarantees and director duties).

If you’re planning to use a corporate trustee, you may need a Company Set Up and often a tailored Company Constitution (especially if you want specific governance rules beyond the replaceable rules).

How Distributions Typically Work

The trustee can usually distribute income (and sometimes capital) to one or more beneficiaries. For business owners, this flexibility is often the “headline” benefit of discretionary trusts in Australia.

That said, trust distributions aren’t just a casual choice - they need to be:

• allowed by the trust deed;
• properly resolved/documented (and in practice, often within required timeframes); and
• consistent with tax and compliance requirements.

It’s also common for beneficiaries to be entities, not just individuals (for example, a company can be a beneficiary). Where that happens, you’ll want to be careful about how those entitlements are recorded, and whether they create things like loans or unpaid present entitlements that need to be managed properly.

Depending on how your accountant sets it up, you may also need to consider whether certain arrangements look like a director loan (which can have tax and governance implications).

How A Discretionary Trust Earns Income

A discretionary trust can earn income from many sources, including:

• business trading income (selling goods/services);
• rent from property (where a trust holds business premises or investment property);
• dividends (where a trust holds shares); and
• capital gains (for example, sale of an asset).

For small businesses, the most common use is a trust running the trading business (a discretionary trading trust), which we’ll cover next.

Discretionary Trading Trusts In Australia (And Whether It’s A Company)

A common question we hear is: what is a discretionary trading trust in Australia, and how is it different from a company?

A discretionary trading trust is simply a discretionary trust that actively runs a business (i.e. it “trades”). It might operate a café, consultancy, construction business, online store, health practice, or any other trading activity.

Is A Discretionary Trading Trust A Company?

No - a discretionary trading trust is not a company.

The trust is a structure, and the trustee is the one that acts. The trustee might be:

• you personally (individual trustee); or
• a company (corporate trustee).

This is where people often get confused: if the trustee is a company, you’ll see a company name on contracts and invoices, but it will usually be “as trustee for” the trust (for example, “ABC Pty Ltd as trustee for the ABC Family Trust”).

So while a discretionary trading trust can use a company as trustee, it isn’t itself a company.

Why Do Businesses Use A Discretionary Trading Trust Structure?

Business owners often look at discretionary trading trusts in Australia because they want a structure that can combine:

• flexible distributions (subject to tax rules);
• asset-holding options (depending on how you structure it); and/or
• separation between operating risk and long-term ownership (often used alongside other entities).

But it’s important to be realistic: there’s no “one best structure” for every business. A discretionary trust can be powerful, but it also comes with set-up and ongoing admin that you’ll want to be prepared for.

When Should Your Business Consider Using A Discretionary Trust?

There are a few business scenarios where discretionary trusts in Australia are commonly used. If one or more of these sound like you, it may be worth getting tailored advice.

1. You Want Flexibility In Who Receives Income (Within The Family Group)

One reason people explore discretionary trusts in Australia is the flexibility they can offer around income distribution.

If your business income varies year-to-year, a discretionary trust may allow distributions to different beneficiaries over time (for example, different family members) depending on your circumstances.

Keep in mind: distribution planning is heavily tax-dependent and fact-specific. Sprintlaw doesn’t provide tax advice, so it’s important to coordinate the legal set-up with your accountant or tax adviser.

2. You’re Thinking About Asset Protection (But Want To Structure It Properly)

Trusts are often discussed in the context of asset protection - for example, where valuable assets are held in one entity, while higher-risk trading activities sit in another.

However, asset protection is not automatic, and it can be misunderstood. In particular, the trustee is typically the contracting party and can be personally liable (for example, an individual trustee) or expose the trustee company to liability. Trustees usually rely on rights of indemnity out of trust assets, but that protection can be limited in practice (including where documents aren’t correctly drafted or the trustee acts outside power), and insolvency scenarios can still create real risk.

That’s why the outcome depends on things like:

• who the trustee is;
• whether personal guarantees are given;
• how contracts are signed;
• how assets and cash are actually handled; and
• whether the overall structure is implemented consistently.

A well-structured arrangement can reduce risk, but a poorly structured one can create confusion (and sometimes extra exposure).

3. You Want A Structure That Can Work Alongside A Company

Many growing businesses don’t choose between “trust” or “company” - they use both for different purposes (for example, a trust holding shares in a company, or a trust running a business with a corporate trustee).

If you’re bringing on co-founders or investors, you may also need documents that clearly set expectations around ownership and decision-making, like a Shareholders Agreement (where a company is involved).

4. You’re Building A Family Business With Succession In Mind

If you’re planning for long-term succession (for example, transitioning control to children or other family members), a discretionary trust can sometimes provide a framework for managing control and benefit over time.

Because trusts can be very flexible, it’s important to get the deed right at the start - changing it later can be difficult, and sometimes creates tax or duty issues.

5. You Understand The Admin And Compliance Load

Trusts can be great, but they’re not always “simple.” In many cases, a discretionary trust will require:

• ongoing bookkeeping and tax reporting;
• proper trustee resolutions for distributions;
• clear separation of personal and trust finances; and
• careful contracting (so it’s clear who is actually responsible).

If you want minimal admin, a different structure may be more suitable - or you may prefer to keep the trust for asset-holding only, rather than trading.

What Are The Key Legal (And Practical) Considerations For Discretionary Trusts In Australia?

Before you set up a trust, it helps to understand the main legal and commercial issues business owners run into - because this is where small mistakes can become expensive ones.

Getting The Trust Deed Right

The trust deed is the foundation document. It sets out things like:

• who the beneficiaries are (and what class of beneficiaries can be added later);
• how distributions can be made;
• how the trustee can be changed;
• what powers the trustee has (for example, borrowing and investing); and
• when and how the trust ends (vesting date).

For businesses, you’ll also want the deed to match what you’re actually doing (for example, trading activities, bringing on new beneficiaries, and financing). A “generic” trust deed can create practical limits you didn’t anticipate.

ABN, TFN And Registrations

A discretionary trust typically needs its own registrations, and the trustee may also have its own registrations depending on the set-up.

For example, you may need to apply for a TFN for the trust, an ABN, and potentially GST registration if your turnover meets the threshold. If you’re unsure how these identifiers fit together, Trust requirements can help you understand the difference between the trust, the trustee, and the relevant numbers and registrations.

Contracting: Making Sure The Right Party Signs

Because the trustee is the party that acts, contracts should usually be signed in the trustee’s name, often with the “as trustee for” wording.

If contracts are signed in the wrong name (or without properly identifying the trustee), you can end up with disputes about:

• who is actually responsible for payment;
• whether a personal liability has been created; and
• whether the trust can enforce its rights against the other party.

This matters for customer agreements, supplier arrangements, leases, employment contracts, and anything else where risk and liability can arise.

Finance And Security Interests (PPSR)

If your trust is borrowing money or buying assets on finance, lenders and suppliers may want security.

In Australia, security over business assets is often documented through agreements like a general security agreement (and may also involve registration on the Personal Property Securities Register (PPSR)).

This can become more complex where there’s a trustee, beneficiaries, and potentially multiple related entities - so it’s worth getting advice before signing funding documents.

Employees, Contractors And Business Operations

If your discretionary trust is actively trading, you may hire staff or engage contractors. The same workplace laws apply as they would to any other business structure.

In many cases, you’ll want to have an Employment Contract in place that clearly identifies the employing entity (usually the trustee as trustee for the trust) and sets expectations on duties, confidentiality, and termination.

Privacy And Customer Data

If you collect customer information - for example through an online store, email marketing list, bookings system, or enquiry form - you may need to comply with privacy requirements.

A Privacy Policy helps explain what personal information you collect, why you collect it, and how you store and use it. Even for smaller businesses, getting this right early can reduce complaints and build customer trust.

Working With Your Accountant (And Avoiding “DIY” Tax Outcomes)

Trusts can have tax effects (including potential advantages in some circumstances), but they can also create tax issues if they’re not managed properly.

For example, you’ll want to consider (with your accountant or tax adviser):

• how distributions are documented and when;
• whether beneficiary entitlements are paid or left outstanding;
• whether any arrangement looks like a loan (especially where companies are beneficiaries); and
• whether your structure still suits your business once you scale (new locations, new owners, external finance, or a sale).

In other words: a discretionary trust can be an excellent tool, but it needs to match your business goals - not just tax outcomes. Sprintlaw can help with the legal structuring and documents, and we recommend getting tax advice alongside that process.

Key Takeaways

• Discretionary trusts in Australia are commonly used by small businesses for flexibility in distributing income to beneficiaries, but the trust itself is not a separate legal entity like a company.
• A discretionary trading trust is simply a discretionary trust that runs an active business, and while it can have a company as trustee, it is not itself a company.
• Your trust deed matters - it sets the rules for control, beneficiaries, trustee powers, and distributions, so getting it right at the start is crucial.
• Practical issues (like signing contracts in the correct trustee name, handling finance properly, and keeping clean records) can make or break how well the structure works.
• If your trust trades, you’ll still need the usual business compliance foundations - including customer contracts, privacy compliance, and employment arrangements.
• The best structure depends on your goals (growth, risk, family involvement, succession) and is often tax-dependent, so it’s worth getting tailored legal and accounting advice before you commit.

If you’d like help setting up or reviewing a discretionary trust for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.