Fixed Trust Vs Discretionary Trust In Australia: Which Suits You?

Choosing a trust structure is a big call for any Australian small business. If you’re tossing up between a fixed trust and a discretionary trust, you’re not alone - both are popular for asset protection and tax flexibility, but they work very differently.

In this guide, we’ll break down fixed vs discretionary trusts in plain English, compare their pros and cons for small businesses, and outline what to consider before you set anything in stone. We’ll also touch on setup steps and the key documents you’ll need so you can decide with confidence.

By the end, you’ll have a clear picture of which trust type could be the right platform for your growth - and where tailored advice can save you time, tax headaches and risk.

What Is A Trust In Australia?

A trust is a legal arrangement where a trustee holds and manages assets for the benefit of one or more beneficiaries, according to a written trust deed. Many business owners use trusts to hold business assets, run operations through a trustee, or hold shares in their trading company.

At a high level, trusts can support asset protection and potential tax efficiencies when set up and managed well. If you’re new to trusts, it’s worth reading a refresher on trusts in Australia before you decide which type suits your plans.

A quick note on roles you’ll see in this article:

• Trustee: the person or company that legally owns and manages the trust property.
• Beneficiaries: the people/entities who benefit from the trust.
• Settlor: the person who sets up the trust and “settles” (gifts) the initial property - read more about the Settlor and why their role is tightly defined.
• Trust Deed: the rule book that governs how the trust operates (it’s critical to get this right).

Fixed Trust Vs Discretionary Trust: How Do They Work?

While both are trusts, the big difference is how income and capital are distributed to beneficiaries - locked-in entitlement vs trustee discretion.

Fixed Trusts (Often Called Unit Trusts)

In a fixed trust, each beneficiary has a fixed entitlement to income and capital. Most fixed trusts in a business context are unit trusts. Beneficiaries hold “units” (like shares), and distributions are typically made in proportion to the units held.

Key features you’ll notice in practice:

• Predictable entitlements: unit holders are entitled to distributions according to their units.
• Investor friendly: works well when unrelated investors need certainty and transparency.
• Transferable interests: units can often be sold or transferred subject to the trust deed.
• Governance: a Unitholders Agreement can complement the trust deed to manage decision-making, exits and disputes.

Discretionary Trusts (Often Called Family Trusts)

In a discretionary trust, the trustee has discretion (within the deed’s rules) to decide which beneficiaries receive income and/or capital, and in what amounts, each year. There are no fixed entitlements.

Key features small businesses value:

• Flexibility: the trustee can “stream” income to beneficiaries in a tax-effective way (subject to the tax rules and your adviser’s guidance).
• Family-focused: commonly used by families where control remains close and long-term succession is important.
• Asset protection: discretionary entitlements are generally not “owned” by beneficiaries until distributions are made.

Key Differences At A Glance

• Entitlements: fixed trusts lock in entitlements; discretionary trusts allow trustee choice each year.
• Investor alignment: fixed trusts suit third-party investors; discretionary trusts suit family-owned businesses.
• Flexibility: discretionary trusts offer more distribution flexibility; fixed trusts offer more certainty.
• Control documents: unit trusts often pair with a Unitholders Agreement; discretionary trusts rely heavily on the trust deed and trustee discretion.
• Tax treatment: both are generally “flow-through” for tax; who gets the income and how is determined differently (you should confirm tax outcomes with your accountant).

When Would A Small Business Choose A Fixed Trust?

A fixed trust (unit trust) is often chosen when certainty and investor alignment matter most. Consider a fixed trust if any of these ring true for your business:

• You’re raising capital from unrelated investors who want clear, proportional rights to income/capital.
• You want a structure that looks and feels like shareholding - unit holdings mirror ownership percentages.
• You plan to admit or exit investors over time, with units that can be transferred (subject to consent and pre-emption rights).
• You need transparent valuation and exit mechanics - typically handled in a Unitholders Agreement aligned with the trust deed.
• You want to attract key team members with an equity-style interest using units (again, check the deed and tax implications).

In short, a fixed trust can work well when the business looks like a collaborative investment with clear, fixed entitlements - much like a company with shareholders.

When Is A Discretionary Trust A Better Fit?

A discretionary (family) trust is usually picked when you want distribution flexibility, tighter control, and greater asset protection features.

Consider a discretionary trust where:

• Your business is family-owned and you want to distribute income yearly based on changing circumstances.
• You’re aiming to manage tax outcomes lawfully by choosing who receives distributions (always get tax advice).
• Succession planning matters - control can remain with a trusted person or corporate trustee over time.
• Asset protection is a priority - beneficiaries don’t hold fixed entitlements until distributions are resolved.

Many founders also use a discretionary trust to hold shares in their trading company (rather than running the business directly through the trust). This gives flexibility at the owner level while the company handles day-to-day trade. If you’re considering this approach, it’s worth understanding beneficially holding shares and the additional governance documents needed at company level.

Practical Setup Steps And Documents

Once you’ve decided which trust type suits your goals, it’s time to set things up the right way. The exact steps depend on your situation, but most small businesses will consider the following.

1) Choose The Trustee (Individual Or Company)

Many business owners appoint a corporate trustee for limited liability and clear separation of personal and business risk. A company trustee can also make changes in control (e.g. by changing directors or shareholders) without changing the trust itself.

2) Draft And Execute The Trust Deed

This is your rule book - it must clearly set out powers, beneficiaries, distribution mechanics, and how the trust is managed day-to-day. Ensure it reflects your intended trust type (fixed/unit or discretionary) and aligns with your future plans (admissions, exits, streaming rules, and variations).

3) Settle The Trust Properly

The Settlor’s role is narrow but important. The initial settlement amount, independence of the Settlor, and proper execution steps matter. If you’re unsure, review the details on the Settlor to avoid common pitfalls.

4) Register ABN/TFN And Open A Bank Account

Trusts generally need their own ABN and TFN to operate and lodge returns. Our summary on trust requirements (ABN, TFN and related steps) is a useful checklist as you get up and running.

5) Put Supporting Agreements In Place

• Unit trust: a well-drafted Unitholders Agreement should sit alongside the trust deed to handle voting, funding, distributions, exits and restraints.
• Operating via a company: if your trust will hold shares in a trading company, consider a Shareholders Agreement among the owners of that company to manage control and decision-making.
• Supplier/customer relationships: use clear commercial contracts (service agreements, terms of trade) that name the trustee correctly and allocate risk appropriately.

6) Plan Governance And Control

Decide how decisions are made and documented. Keep trustee minutes, follow the trust deed for resolutions, and ensure distributions are resolved and documented before year-end where required by the deed.

7) Think About Structure For Scale

If your trust will only hold assets or shares (and you’ll trade through a separate company), you’re effectively creating a special purpose vehicle. This can be a smart way to isolate risk and keep flexibility for growth, franchising or investment later.

Legal And Compliance Considerations For Trust-Run Businesses

Trusts don’t replace your general business obligations. Whether you trade through the trust or through a company the trust owns, everyday compliance still applies:

• Tax and reporting: speak with your accountant about GST registration, PAYG withholding, trust distribution resolutions and lodgements.
• Employment: if you hire staff, make sure you’re meeting Fair Work requirements, using proper employment contracts and managing entitlements.
• Consumer protection: if you sell goods or services, the Australian Consumer Law (ACL) applies to refunds, warranties and marketing claims.
• Privacy: if you collect personal information, ensure the trustee has a compliant Privacy Policy and follows the Privacy Act.
• IP and brand: consider protecting your brand with trade marks and use solid contracts to deal with contractors, suppliers and distributors.

The big point here is that your trust is the ownership and control layer - your trading obligations still apply in full. Get both layers right from day one to avoid fines, disputes or reputational issues.

Which Is “Better” - Fixed Or Discretionary?

There’s no one-size-fits-all answer. It comes down to ownership goals and how you want to manage distributions, control and investor expectations.

A fixed (unit) trust usually suits a multi-investor business where certainty is essential. A discretionary trust usually suits a family business where flexibility and asset protection are priorities.

Also think ahead: Will you raise third-party capital? Offer equity to key staff? Hold passive assets like IP or real estate? Hold shares in a trading company, rather than trade in the trust? Each of these can influence what works best, and whether you combine trust and company entities for a robust, scalable structure.

Changing Your Mind: Can You Convert Or Vary A Trust?

Trusts can be varied, but only within the powers set out in the trust deed and the law. Major changes risk “resettlement” (treating your trust as a new trust) with significant tax and duty implications. If you’re contemplating changes - for example, altering unit rights, adding or excluding beneficiaries, or modernising distribution clauses - you’ll likely need a carefully drafted Deed of Variation.

The safest approach is to design the right structure from the start and build in the flexibility you genuinely need. If changes are unavoidable, get tailored legal and tax advice before you move.

Real-World Scenarios To Help You Decide

Scenario 1: Two Unrelated Founders + Future Investors

You and a colleague plan to launch a tech product and bring in external investors next year. A fixed trust (unit trust) may be attractive because unit holdings mirror ownership and are easier to present to investors. Pairing the deed with a strong Unitholders Agreement helps set expectations for capital calls, vesting, exits and dispute resolution.

Scenario 2: Family-Owned Services Business

You’re building a professional services brand with family members and want the flexibility to direct income each year as circumstances change. A discretionary trust could suit your control and distribution goals - and your trust could hold the shares in your operating company to separate trading risk from family assets. Brush up on the mechanics of beneficially holding shares to set this up correctly.

Scenario 3: Asset-Holding Vehicle For IP Or Property

You want a vehicle to hold valuable IP and license it to trading entities. A trust can work well for asset holding, especially as a special purpose vehicle. Whether fixed or discretionary is best depends on who should ultimately benefit and how flexible you need distributions to be.

Common Mistakes To Avoid

• Using the wrong trustee name in contracts and invoices. Always contract in the trustee’s name “as trustee for ”.
• Not documenting distributions correctly before year end (refer to your deed and accountant’s advice).
• Failing to align the trust deed with your commercial documents (e.g. conflicts between deed and Unitholders Agreement).
• Underestimating control mechanics - who can appoint/remove the trustee, who holds appointor/principal powers, and how succession is handled.
• Assuming you can “switch” trust types later without consequences - variations must be carefully managed.

Key Takeaways

• Fixed trusts (unit trusts) provide certainty and are often better for multiple, unrelated investors who want proportional rights.
• Discretionary trusts (family trusts) offer distribution flexibility and robust control for family-owned businesses and succession planning.
• Your trust deed does the heavy lifting - draft it to match how you’ll run the business and pair it with the right supporting agreements.
• Sort the basics from day one: trustee choice, deed execution, ABN/TFN registration, bank accounts and governance steps.
• If your trust will hold company shares or units for investors, consider a Shareholders Agreement and/or Unitholders Agreement to manage control, funding and exits.
• Changing a trust later is possible but risky - significant amendments typically require a careful Deed of Variation and tax advice to avoid resettlement.

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