Trust Disadvantages in Australia: Key Considerations Before Setup

Thinking about setting up a trust for your small business? Trusts are often promoted for their asset protection and tax flexibility. But they’re not the best fit for every venture.

Before you jump in, it’s worth understanding the practical drawbacks that founders often discover after the structure is in place. Getting this clarity now can save you time, money and complexity down the track.

In this guide, we unpack the key disadvantages of a trust for Australian small businesses, how they compare to a company, and practical ways to manage the risks.

What Is A Business Trust, In Plain English?

A trust is a legal relationship where a trustee holds and manages assets for the benefit of others (the beneficiaries). In a business context, a trust can operate the trading activity and distribute profits to beneficiaries, usually at the end of each financial year.

Most small businesses use discretionary (family) trusts or unit trusts. Your trust’s powers and limitations are set out in the trust deed - the core document that governs how decisions are made and who benefits. If you’re new to this, it may help to read a broader overview of trusts in Australia and how they’re used by business owners.

A trust will have its own TFN and, in many cases, its own ABN. There are specific trust requirements around tax registrations and administration that apply in addition to your day-to-day business obligations.

The Main Disadvantages Of A Trust For Small Businesses

1. Complexity And Administration Costs

Trusts add a layer of legal and tax complexity to simple businesses. Your accountant and lawyer will spend time interpreting the trust deed, preparing distribution resolutions, and managing compliance each year.

This can mean higher professional fees compared with operating as a sole trader or even a straightforward company structure. If your business is small or still finding product-market fit, that extra cost and admin can be a drag on growth.

2. Limited Ability To Retain Profits

Unlike a company, most trusts can’t simply retain profits to reinvest in the business without tax consequences. Profits generally need to be distributed to beneficiaries each financial year, or the trust may be taxed at the top marginal rate on undistributed income.

That makes it harder to build capital inside the trading structure for expansion, equipment purchases or a buffer for lean periods. Workarounds (like distributing to a corporate beneficiary) add further complexity and must be carefully managed for tax and legal compliance.

3. Banking And Investor Challenges

Banks and investors tend to prefer simple, familiar structures. Raising capital, admitting new owners or negotiating finance often becomes more complicated with a trust.

For example, an investor may expect ordinary shares and voting rights in a company, but a discretionary trust doesn’t issue shares. You can pair a trust with a company (for example, a company as trustee or a company as a beneficiary), but that adds more moving parts.

4. Control Can Be Less Clear Than You Think

In a discretionary trust, beneficiaries don’t own specific entitlements until the trustee makes a distribution. Real power sits with the trustee and, in many deeds, with an appointor who can remove and replace the trustee.

If the trust deed isn’t drafted with care - or if roles change over time - the person you assume is “in charge” may not have the legal authority you expect. That can create conflict if business partners fall out or if there’s a succession event.

5. The Trust Deed Can Lock You In

Your trust deed sets the rules. If your business evolves, those rules may become a poor fit. Amending a deed can be costly and, if done incorrectly, may trigger adverse tax outcomes (including a potential resettlement with related stamp duty or capital gains tax implications).

It’s why the initial deed needs to be carefully prepared. If you’re considering changes later, get help early and make sure amendments are made in line with how deeds work under Australian law.

6. Personal Liability Risks For Individual Trustees

If an individual acts as the trustee, they can be personally liable for the trust’s obligations (even if they may be indemnified from trust assets). That’s risky for a trading business dealing with customers, leases and suppliers.

Using a company as trustee can reduce this risk (because a company is a separate legal entity), but it introduces company compliance on top of trust administration.

7. Distributions Are Not Always Flexible In Practice

Discretionary trusts are promoted as “flexible.” However, that flexibility is still bounded by the trust deed, trust law and tax rules. Distribution minutes must be made correctly and on time. There are also anti-avoidance rules and beneficiary eligibility rules to navigate.

If you get this wrong, distributions can be ineffective or taxed in unexpected hands, and there may be penalties or additional tax to pay.

8. Complications When Admitting New Owners Or Exiting

Bringing in a co-founder, splitting the pie fairly, or exiting the business later is often harder in a trust compared to issuing or transferring shares in a company.

With a unit trust you can transfer units, but that may attract duty or tax. With a discretionary trust, you generally can’t “sell a slice” of control in the same clean way you can with shares.

9. Potential State Taxes And Surcharges (Property-Related)

If your business holds real property through a trust, some states impose surcharge duty or land tax where any potential beneficiary is a foreign person. Family trust elections or carefully drafted beneficiary classes can mitigate this, but it adds complexity that many founders don’t anticipate.

10. Winding Up Isn’t Always Straightforward

Ending a trust requires careful attention to the deed and to tax consequences when distributing remaining assets. Compared to deregistering a small company, this process can be more involved and time-consuming.

Trusts Versus Companies: Which Structure Works Better As You Grow?

There’s no one-size-fits-all answer. But it’s helpful to compare how the structures behave once your business scales beyond the early days.

• Profit retention and reinvestment: Companies can retain earnings for future growth without immediate distribution. Trusts generally distribute income annually or face top-rate tax on undistributed amounts.
• Bringing on co-founders and investors: Companies issue shares and can use shareholder classes, options and vesting. This is harder (or more complex) to replicate in a trust structure.
• Bankability and exits: Banks and buyers often prefer a clean company share sale. A trust can still sell business assets, but transaction mechanics and tax outcomes can be less straightforward.
• Liability containment: A company is a separate legal entity, which helps ring-fence risk. Trusts rely on trustee protections and proper contracting to manage exposure.

If you lean towards a company, you’ll still want a few core governance documents in place, such as a Company Constitution to set decision-making rules and a Shareholders Agreement to manage ownership, exits and investor rights. If you’re starting fresh, our Company Set Up package can establish the right foundation from day one.

Many founders also use trusts alongside companies - for example, a discretionary trust holding shares in the operating company. If you’re considering beneficially holding shares through a trust, make sure you understand the flow-on tax, control and compliance implications.

Hidden Risks And Compliance Traps To Watch

The Trust Deed Rules Everything

The trust deed is the blueprint. If it’s vague, restrictive or out of date, routine decisions (appointing or removing a trustee, making distributions, adding beneficiaries) can become legal hurdles.

Keep a current, signed copy of your deed handy and build business processes around its requirements. Any amendments should be carefully drafted to avoid inadvertently creating a new trust.

Who Is The Appointor?

The appointor can often hire and fire the trustee. If the wrong person holds that role - or if succession isn’t clear - your business can be exposed during disputes, relationship changes or incapacity events.

Timing And Documentation Of Distributions

Discretionary distribution minutes generally need to be made before the end of the financial year. Miss the window or name the wrong class of income and your tax position can change dramatically. Get a rhythm with your accountant well before 30 June.

Trustee Capacity And Signing Contracts

Contracts should be executed in the correct trustee capacity (for example, “XYZ Pty Ltd as trustee for the ABC Trust”). Signing in the wrong name can create personal liability or unenforceable contracts. This sounds minor, but it’s a common and costly error.

Adding Or Changing Beneficiaries

Adding beneficiaries or altering classes can affect eligibility for distributions, land tax surcharges, and duty. Always confirm the deed allows the change, follow the mechanics precisely, and consider the tax impact across relevant states.

Using A Bare Trust For Assets

Sometimes founders use a custodian arrangement (often called a bare trust) for holding an asset for the business. These are useful in narrow scenarios, but they don’t provide the same decision-making framework as a trading trust. If you’re exploring a bare trust, get clear on what it does - and doesn’t - cover.

Can You Reduce These Downsides? Practical Alternatives And Workarounds

1. Consider A Company As The Primary Trading Vehicle

For many growing businesses, a company simplifies ownership, capital raising, profit retention and exits. You can still use a discretionary trust at the shareholder level if you need distribution flexibility for family planning.

If you go this route, make sure you’ve got the basics in place: a tailored Company Constitution, sensible share classes, and clear founder arrangements in a Shareholders Agreement. These documents will do a lot of heavy lifting on governance and future-proofing.

2. Use A Corporate Trustee (If You Trade Through A Trust)

If you prefer to trade through a trust, consider appointing a company as trustee to help limit personal liability. This does not eliminate commercial risk - you still need good contracts, insurance and compliance - but it’s an important protection compared with an individual trustee.

3. Draft A Future-Focused Trust Deed

Ensure the deed contemplates the business you plan to build, not just today’s needs. This includes clear appointor provisions, trustee powers to run a trading business, beneficiary definitions that won’t cause land tax headaches, and flexible income and capital distribution powers.

Because trust rules are embedded in a deed, it’s worth investing in a robust document at the start. If you’re not sure how deeds operate generally, this primer on what a Deed is can help you orient before drafting.

4. Plan Your Profit Flow Early

Work with your accountant to map where profits will go each year and what that means for cash flow, reinvestment and tax. If you plan to distribute to a corporate beneficiary, make sure inter-entity loans are documented and managed properly - these arrangements can be scrutinised.

5. Keep Roles And Signatories Crystal-Clear

Document who is the trustee, who is the appointor, and who can sign contracts. Train your team to use the correct entity names on invoices, bank accounts and contracts. This small operational discipline avoids big legal headaches later.

6. Revisit Your Structure As You Scale

The “right” structure at launch may not be right at year three. Set a calendar reminder to review your structure and governance annually or after major milestones (new product line, funding round, entering new states).

What Documents And Registrations Will You Typically Need?

Whether you choose a trust, a company, or a hybrid, having the right documents and registrations in place will make daily operations smoother and reduce risk.

• Trust Deed (if using a trust): The governing document that sets powers, beneficiaries and distribution rules. Keep it current, and store signed copies securely.
• ABN, TFN and (if applicable) GST Registration: Trusts and companies have separate registrations and tax filings. Confirm the trust requirements that apply to your setup.
• Company Constitution (if using a company): Internal rules that complement the Corporations Act and outline director powers, meetings and share rights. See Company Constitution.
• Shareholders Agreement (if there’s more than one owner): Sets decision-making, exits, financing and dispute processes between founders and investors. See Shareholders Agreement.
• Key Commercial Contracts: Customer Terms, Supplier Agreements and NDAs that reflect the correct contracting entity (for example, trustee company on behalf of the trust).
• Employment Contracts and Policies: If you hire staff, ensure compliant employment documents and workplace policies.
• IP Protection: Consider trade mark protection for your brand name and logo and keep ownership aligned with your chosen entity.

Key Takeaways

• Trusts can be useful for asset protection and family tax planning, but they come with complexity, annual distribution rules and governance quirks that don’t suit every small business.
• Common disadvantages include limited profit retention, bank and investor hesitation, deed-driven constraints, and potential personal liability if an individual is the trustee.
• A company often simplifies ownership, capital raising, profit retention and exits; you can still use a trust at the shareholder level if you need distribution flexibility.
• The trust deed rules everything - get it right at the start, document roles clearly, and manage distributions and signing capacity with care.
• Review your structure as you grow. If your needs have outgrown your current setup, consider moving to (or adding) a company with a strong governance framework.
• For any structure, align your registrations, contracts and IP with the correct legal entity to avoid enforcement and tax issues.

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