How To Set Up A Discretionary Trust In Australia

Choosing the right structure for your business isn’t just paperwork - it can affect how you pay tax, protect assets, bring in partners, and plan for growth.

If you’ve been searching for a guide to discretionary trust set up, chances are you’re weighing up whether a discretionary (family) trust could give your startup or small business more flexibility. In many cases, it can - but only if it’s set up properly and managed carefully.

In this practical guide, we’ll walk you through what a discretionary trust is, when it makes sense for a small business, and the key steps involved in setting up a discretionary trust in Australia (without drowning you in legal jargon).

What Is a Discretionary Trust (And When Does It Make Sense for a Business)?

A discretionary trust is a legal structure where a trustee holds assets (like business income, shares, or investments) on trust for a group of beneficiaries.

It’s called “discretionary” because the trustee generally has discretion to decide which beneficiaries receive income or capital from the trust each year, and how much they receive (as long as the trust deed allows it).

How A Discretionary Trust Works in Simple Terms

• The trust deed sets the rules (who can benefit, how decisions are made, what powers the trustee has).
• The trustee runs the trust and makes decisions (this can be an individual or, commonly, a company).
• The appointor (sometimes called the principal) usually has the power to appoint and remove the trustee - this role is critical for control.
• Beneficiaries are the people (or entities) who can receive distributions.

For many business owners, a discretionary trust can be useful because it can provide:

• Flexibility to distribute profits to different beneficiaries (subject to tax and other rules)
• Asset protection benefits in some scenarios (it’s not a “magic shield”, and outcomes depend heavily on the facts and how the trust is run, but it can form part of an overall risk management approach)
• Succession planning options for family businesses

When A Discretionary Trust Might Not Be the Best Fit

A discretionary trust isn’t automatically the best structure for every startup. Some common reasons it may not suit include:

• Raising capital: investors often prefer companies (because shares are straightforward)
• Employee equity: offering options and equity incentives is typically easier through a company structure
• Complexity: trusts come with ongoing admin and compliance that you need to keep on top of

If you’re planning to scale fast, bring in investors, or build a tech startup with equity incentives, you might still use a trust - but often alongside a company (for example, a trust owning shares in a company). It’s worth getting advice on the “shape” of the structure before you lock anything in.

Discretionary Trust Set Up: Step-By-Step for Small Businesses

Here’s what a typical discretionary trust set up process looks like in Australia. The exact steps can vary depending on how you want the trust to operate and what it will own (for example: a trading business vs holding investments).

1) Decide What the Trust Is For (Trading, Investing, Holding Shares)

Start with clarity on what the trust will actually do. For example:

• Will the trust trade (run the business and earn income)?
• Will it hold shares in a company that trades?
• Will it hold investments or business assets (like IP or equipment)?

This matters because it can affect everything from the trust deed clauses you need, to bank accounts, to how risk is managed in practice.

2) Choose the Trustee (Individual vs Corporate Trustee)

You can set up a discretionary trust with:

• An individual trustee (a person), or
• A corporate trustee (a company acting as trustee)

Many small businesses choose a corporate trustee because it can help with administration, continuity (directors can change without changing the trustee), and risk separation.

If you need a company as trustee, this is usually done through a Company Set Up, and then that company is appointed as trustee in the trust deed.

3) Identify the Key Roles: Appointor, Beneficiaries, and Successors

This is one of the most important (and most commonly overlooked) parts of setting up a discretionary trust. You’ll usually need to consider:

• Appointor: who controls the trustee appointment/removal power?
• Primary beneficiaries: often you and/or your family members (depending on your goals)
• General beneficiaries: a wider class (often defined in the deed)
• Default beneficiaries: who benefits if the trustee doesn’t make a distribution decision?
• Successor appointor / succession provisions: what happens if someone dies or becomes unable to act?

Control and succession are usually where trusts either work brilliantly - or create long-term problems. Getting the roles right in the deed from day one can save you from expensive fixes later.

4) Prepare and Sign the Trust Deed

The trust deed is the legal foundation of the trust. It sets out:

• how the trust operates
• the trustee’s powers
• who can benefit
• how income/capital can be distributed
• how trustees are appointed/removed
• how the trust can be amended (if at all)

Because the deed is so central, it’s important that it’s tailored to the way your business will operate (not copied from a generic template that doesn’t reflect your real plan).

5) Organise the Settled Sum (And Don’t Forget the Settlor)

Most discretionary trusts are “settled” with a small initial amount (often called the settled sum), contributed by a settlor.

The settlor is the person who establishes the trust by contributing the initial amount. This role may sound minor, but it matters - especially for family trusts and control issues. If you’re not sure who should be the settlor, the settlor role is a good place to start when you’re mapping out the structure.

6) Apply for a TFN (and ABN if Needed)

Once the trust exists, you’ll generally need a Tax File Number (TFN) for the trust, because the trust will usually need to lodge tax returns.

Whether you need an Australian Business Number (ABN) depends on what the trust will do. If the trust is running a trading business, it will generally need an ABN and may also need to register for GST (depending on turnover and the specific activities of the trust). Tax and registration obligations can be nuanced, so it’s a good idea to confirm your position with an accountant or tax adviser.

It also helps to understand what identifiers apply to trusts and related entities - trust requirements are a common source of confusion when you’re setting everything up for the first time.

7) Open a Bank Account and Set Up Record-Keeping

Even if you’re a small operation, treat the trust like a real structure from day one:

• open a dedicated trust bank account
• keep clean bookkeeping records
• store the executed trust deed and trustee resolutions
• document decisions (especially distributions) properly and on time

If the trust is going to run your business, you’ll also want your customer invoices, supplier arrangements, and payments to match the correct legal entity (the trustee as trustee for the trust).

What Decisions Should You Make Before You Set Up the Trust?

A discretionary trust can be a powerful structure, but the best outcomes usually come from making a few key decisions upfront - not after you’ve started trading.

Will the Trust Trade, or Will a Company Trade Instead?

Many startups use a structure where:

• a company operates the business (employs staff, signs customer contracts, carries risk), and
• a discretionary trust owns shares in that company (so profits can potentially flow to beneficiaries via distributions of dividends, depending on the structure and tax advice)

This can be useful where the business has higher risk, or where you want flexibility in how wealth is held. But it does add complexity, so it’s important to plan it properly.

Who Needs Control (Now and Later)?

Control usually comes down to:

• who is the trustee (or who controls the corporate trustee)
• who is the appointor
• succession provisions

If you have co-founders, you’ll also want to think about how decisions are made and what happens if someone exits the business. Often, a trust sits alongside founder arrangements like a Shareholders Agreement (if a company is part of the structure) so everyone is clear on ownership, decision-making, and exit rules.

Are You Planning to Bring in Investors?

If you’re looking to raise capital soon, it’s worth thinking carefully before you do a trust-only structure.

Investors commonly want:

• clear equity ownership
• simple cap tables
• share rights set out in a constitution and shareholder documents

You can still use a trust in an investor-friendly setup - but it’s usually done as part of a broader structure rather than as the only entity involved.

What Are the Ongoing Compliance and Admin Requirements?

One of the biggest surprises for business owners is that the discretionary trust set up process is only step one. The real risk is often what happens after setup - especially if distributions and records aren’t handled correctly.

Trustee Resolutions and Distribution Decisions

In most cases, the trustee must make distribution decisions properly and within the timeframes required under the trust deed (and, where relevant, consistent with tax requirements). Practically, this often means ensuring decisions are documented before the end of the financial year - but the correct timing can depend on the deed and your accountant or tax adviser’s guidance.

Practically, this means documenting:

• who receives trust income for the year
• the amount or percentage (as allowed by the deed)
• how and when it will be paid or credited

If this isn’t done properly, you could end up with unintended tax outcomes and messy disputes between beneficiaries.

Tax Returns, BAS, and GST (If Applicable)

Trusts generally lodge an annual trust tax return and issue distribution statements to beneficiaries. If the trust is trading and registered for GST, it may also need to lodge BAS.

This is where your accountant becomes essential. From a legal perspective, the key is making sure your trust deed and trustee decisions line up with how you’re actually operating. (This article is general information only and isn’t tax advice - it’s best to speak with an accountant or tax adviser about your specific circumstances.)

Signing Contracts in the Right Name

When the trust runs a business, contracts should generally be signed by the trustee entity, “as trustee for” the trust.

If you accidentally sign agreements personally (or under a different entity name), it can create confusion about who is actually responsible for liabilities - which is the opposite of what you want when using structures for risk management.

Finance and Security Interests

If the trust borrows money or buys assets on finance, lenders may require security arrangements.

Depending on the deal, that could involve documents like a general security agreement and PPSR registrations. This is another area where it’s worth getting advice early, because the “standard” lender docs can impose broad security and personal guarantees.

What Legal Documents Might Your Trust-Based Business Need?

Beyond setting up a discretionary trust, most businesses still need the usual legal foundations - the trust is your structure, but contracts and policies are what help you operate safely day to day.

Here are common documents to consider (not every business will need all of them, but many startups need a handful).

• Customer Terms and Conditions / Service Agreement: sets expectations around scope, payment, limitations, and dispute handling.
• Supplier Agreement: helps you manage quality, delivery times, pricing changes, and liability (especially if your business relies on a key supplier).
• Privacy Policy: if you collect personal information (for example, online enquiries, customer accounts, email marketing), you’ll likely need a Privacy Policy.
• Employment Contract: if you’re hiring, a clear Employment Contract helps set duties, pay terms, confidentiality, and termination processes.
• Company Constitution: if you’re using a company as trustee (or you have an operating company), a tailored Company Constitution can help reflect how you actually want the company governed.
• IP Ownership and Licensing Arrangements: if your trust owns brand assets or IP, you may need written agreements to avoid disputes about who owns what (especially when contractors or co-founders are involved).

Key Takeaways

• A discretionary trust can be a flexible structure for small businesses, but it works best when it’s planned around your business model (trading vs holding shares vs investing).
• A solid discretionary trust set up usually involves choosing the right trustee (often a corporate trustee), getting the appointor and beneficiaries right, and putting a tailored trust deed in place.
• Setting up a discretionary trust is only the beginning - ongoing compliance like trustee resolutions, distribution decisions, and correct contract signing is essential.
• If you plan to raise capital or issue equity to co-founders and employees, you may need a trust-plus-company structure rather than a trust-only approach.
• Strong legal documents (customer terms, employment contracts, privacy policies, and company governance documents) help your trust-based business operate smoothly and reduce risk.

If you’d like help with a discretionary trust set up (or a broader structure for your small business or startup), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.