Pros and Cons of Using a Trust in Australia

Choosing the right business structure is one of the biggest early decisions you’ll make. For many Australian small businesses, a trust is on the shortlist alongside a sole trader, partnership or company.

Trusts can be powerful. They offer flexibility around profit distribution, potential tax efficiencies and asset protection benefits when set up and managed correctly. But they’re not a magic fix - trusts also come with costs, paperwork and rules that you’ll need to follow every year.

In this guide, we’ll walk through the pros and cons of a trust from a small business perspective, how trusts compare to companies, what’s involved in setting one up, and the key documents you’ll need to operate compliantly.

What Is A Trust (And How Does It Work For A Business)?

A trust is a legal relationship where a trustee holds and manages assets or runs a business for the benefit of others (the beneficiaries). In practice, many small businesses use either a discretionary (family) trust or a unit trust.

• Discretionary (Family) Trust: The trustee has discretion each year to distribute income and capital among a class of beneficiaries (often family members). This flexibility is one reason family trusts are popular with small businesses.
• Unit Trust: Beneficiaries hold fixed “units” (similar to shares). Distributions are usually made in proportion to the number of units held. Unit trusts are common where unrelated parties invest together.

Trusts are governed by a trust deed (the rulebook) and relevant trust law. In a business context, you’ll often see a company acting as the trustee to separate liability.

If you’re new to the mechanics, it helps to understand a few building blocks: the trust deed itself (which is a deed), the role of the settlor who starts the trust, and the parties who control and benefit from it. For a deeper dive into the basics, we’ve set out key trust requirements in Australia (ABN, TFN and more) and the role of a settlor.

Pros Of Using A Trust Structure

1) Flexibility In Distributions

With a discretionary trust, the trustee can decide how to distribute income to beneficiaries each year (within the terms of the trust deed). This flexibility can help with legitimate tax planning across family members, particularly where income and tax brackets change over time.

2) Asset Protection (When Structured Correctly)

Trusts can separate ownership of business assets from individuals, and many owners use a company as trustee. This can help protect personal assets from business risks, provided the trust, trustee company and personal finances are kept properly separated and the business operates lawfully.

3) Succession Planning Options

A trust can make it easier to pass control of a business to the next generation without directly transferring assets to individuals. Changes in appointors, trustees and beneficiaries (according to the deed) can support long-term succession planning.

4) Partnering With Others

Unit trusts provide a clear, fixed structure for multiple unrelated investors, which can be easier to manage than a partnership. Where founders or investors hold units, distributions typically follow unit holdings, making entitlements transparent.

5) Flexibility Around Ownership Of Shares

Some founders use a trust to hold shares in an operating company for asset protection or estate planning reasons. If you’re considering this, it’s worth reading more on beneficially holding shares through a trust and how it impacts control and distributions.

Cons And Common Pitfalls

1) Setup And Ongoing Costs

Trusts involve initial establishment costs and annual accounting and compliance. Compared to a sole trader or partnership, you’ll likely spend more time and money on admin and tax reporting (including trust tax returns and beneficiary statements).

2) Complexity And Formalities

Trusts must follow their deed and trust law. Distributions need to be resolved correctly each year, and record-keeping should be meticulous. Mistakes can have tax consequences (for example, if distributions aren’t made or documented properly).

3) Limited Lifespan And Deed Limitations

Trusts may have a vesting date (end date) and other restrictions in the deed. If the deed is too narrow (e.g., limited beneficiaries or activities), you might need variations later to accommodate growth, new investors or a change in business direction.

4) Access To Profits Can Be Less Direct

Unlike a company where dividends go to shareholders, trust distributions must be made to beneficiaries per the deed and tax rules. If the trust runs at a loss, carrying forward and applying those losses has specific rules and is not as straightforward as in a company.

5) Not A “Set And Forget” Vehicle

Trusts offer advantages when actively managed. Failing to follow the deed, paying beneficiaries incorrectly, or mixing personal and trust funds can weaken asset protection and attract ATO scrutiny.

Trusts Vs Companies: Which Suits Your Business?

Trusts and companies are the two most common structures for growing small businesses in Australia. Each has strengths - your choice depends on risk, future plans and how you want to manage profits and ownership.

When A Trust May Suit

• You want flexible profit distributions across family members (discretionary trust).
• You’re building a family-run business with succession planning in mind.
• You’re investing with partners and want fixed entitlements via a unit trust.
• You prefer holding business assets in a separate vehicle to support asset protection (with appropriate advice).

When A Company May Suit

• You want a simple, scalable vehicle with limited liability and perpetual existence.
• You plan to reinvest profits at the company tax rate and retain earnings in the entity.
• You intend to raise capital, issue shares to staff, or bring in external investors.
• You want a straightforward ownership and governance framework using a Company Constitution and (if there are multiple owners) a Shareholders Agreement.

In practice, many businesses use both: a trust (or trusts) holding shares in an operating company. Others adopt a more layered structure, such as a holding company with a trading subsidiary and a trust for ultimate ownership or asset holding. Complex structures should be tailored to your goals and risk profile, and reviewed regularly as you grow.

How A Business Trust Is Set Up And Operated

Here’s what’s typically involved when you establish and run a business via a trust (your precise steps will depend on your adviser’s recommendations and your trust deed).

1) Choose The Type Of Trust

Decide between a discretionary trust and a unit trust based on whether you want flexible or fixed entitlements. In some industries or investment-style ventures, you might also encounter specific forms like bare trusts. Estate planning situations sometimes call for irrevocable trusts, though these are less common for operating businesses.

2) Draft And Execute The Trust Deed

Your trust deed sets the rules. It defines the trustee’s powers, beneficiaries, distribution rules and vesting date. Because the deed governs everything, getting it right at the start is critical.

The deed will be signed as a deed (not just a contract) and may involve stamping, depending on your state or territory. Ensure everyone understands how the deed works before you trade.

3) Appoint The Trustee (Often A Company)

Many business owners appoint a proprietary limited company as trustee to help limit liability. If you go down this path, make sure the trustee company satisfies Australian resident director requirements and has appropriate governance documents (such as a constitution).

4) Obtain ABN, TFN And Registrations

The trust will need a Tax File Number (TFN), and often an Australian Business Number (ABN) if you’re carrying on an enterprise. You’ll also need to consider GST registration if your turnover meets the threshold. These details are part of the broader trust registration requirements.

5) Open Bank Accounts And Keep Clean Records

Open a bank account in the trustee’s name as trustee for the trust and keep trust funds separate from personal funds. Meticulous bookkeeping, board/trustee minutes and distribution resolutions are essential to preserve the trust’s integrity and tax position.

6) Distribute Income Correctly (Each Year)

Trustees need to consider and formally resolve distributions each financial year in line with the deed. Work closely with your accountant on the timing and documentation for trust resolutions and beneficiary statements.

Key Legal Documents And Ongoing Obligations

Running a trust-based business involves a few additional documents and rules beyond a typical company setup. Your exact list will depend on whether you’re using a discretionary or unit trust and your industry.

• Trust Deed: The core set of rules for the trust. It should address the trustee’s powers, beneficiaries, distributions, indemnities, vesting and variation processes.
• Corporate Trustee Documents: If using a company as trustee, you’ll need its constitution and corporate records. If multiple owners are involved at the company level, consider a Shareholders Agreement to manage decision-making and exits.
• Unitholders Agreement (for Unit Trusts): Where there are multiple unit holders, a tailored Unitholders Agreement can set out voting rights, transfer restrictions, distributions, funding obligations and dispute resolution.
• Customer Terms And Contracts: Whether you sell goods or services, clear customer terms (online or offline) reduce disputes and set expectations around scope, pricing, IP, liability and refunds.
• Employment Agreements And Policies: If you hire staff, have compliant employment contracts and workplace policies covering leave, conduct, WHS and privacy.
• Privacy And Website Documents: If you collect personal information, a compliant Privacy Policy and website/app terms will be important for meeting Privacy Act obligations and managing platform risk.
• Supplier, Contractor And Lease Agreements: Lock in your key relationships with robust contracts (e.g., supply, distribution, SaaS, commercial lease) aligned with your risk profile and insurance.

If your structure is part of a more complex arrangement (e.g., a trust holding an operating company within a special purpose vehicle or broader group), ensure your documents align across entities and that related-party dealings are at arm’s length and properly documented.

Frequently Asked Questions About Business Trusts

Is A Trust Always Better For Asset Protection?

Not always. Asset protection depends on correct structuring, compliance and behaviour (e.g., keeping funds separate, proper records, avoiding insolvent trading). A trust with a corporate trustee can support asset protection, but it’s not a guarantee. Insurance and sound risk management remain essential.

Can A Trust Retain Profits?

Trusts generally distribute profits to beneficiaries each year. Retaining income in a trust can have tax implications and needs careful advice. If you plan to retain and reinvest earnings, a company may be more straightforward.

What Happens If The Trustee Changes?

The trust can continue with a new trustee if the deed allows it and the change is executed correctly. Ensure asset titles, bank accounts and registrations are updated and minutes/resolutions are kept.

Do I Need A Company As Trustee?

You can appoint an individual as trustee, but many business owners prefer a corporate trustee to help limit personal risk and make changes in control simpler (e.g., by changing directors or shareholders, rather than changing an individual trustee).

Can A Trust Own Shares In My Trading Company?

Yes, many founders hold shares through a trust for asset protection or family succession goals. Just make sure your deed supports it and you understand the implications, including how distributions and control work in practice.

Key Takeaways

• Trusts can offer flexible distributions, asset protection benefits and succession options - but they require careful setup, documentation and annual compliance.
• Discretionary trusts suit family-run ventures seeking flexibility; unit trusts work well where unrelated investors want fixed entitlements.
• Trusts are not “set and forget.” Follow your deed, make timely distribution resolutions and keep clean records to stay compliant and preserve benefits.
• Companies remain a strong, simple vehicle for scaling, retaining profits and raising capital; many owners use a trust to hold shares in an operating company.
• Your trust deed, corporate trustee documents, customer and employment contracts, and privacy/website policies are core documents to get right from day one.
• Structure should follow strategy - align your trust (or company) setup with your growth, risk and succession plans, and revisit it as your business evolves.

If you’d like a consultation on whether a trust is right for your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.