Using A Trust To Reduce Capital Gains Tax In Australia

If you’re building a business in Australia, you’ve probably heard that “putting it in a trust” can help with tax. When it comes to capital gains tax (CGT), a trust can be a flexible vehicle to manage who is taxed on a gain and when - but the rules are strict, and it’s not a magic “avoid tax” button.

In this guide, we’ll explain how capital gains are treated in trusts, where the real tax advantages can arise, and the legal steps to set up and run a trust properly. We’ll also cover practical strategies that many small business owners consider when they’re planning a sale of shares or business assets, so you can approach CGT with confidence and compliance.

Important note up front: “how to avoid capital gains tax with a trust” is really about legally minimising CGT and managing how gains are taxed, not evasion. Getting professional tax advice alongside legal support is key.

How Do Trusts Handle Capital Gains In Australia?

A trust is a legal arrangement where a trustee holds assets for the benefit of beneficiaries under a trust deed. For small businesses, the most common structures are discretionary (family) trusts and unit trusts.

Unlike a company, a trust is generally not taxed on its own income if the income is distributed to beneficiaries. Capital gains earned by the trust can be distributed to beneficiaries and taxed in their hands, often with access to the 50% CGT discount (if eligibility criteria are met).

For business owners, a trust can offer flexibility in who receives the gain and when. It can also support asset protection and estate planning. We cover these foundations in more detail in our overview of trusts.

Can A Trust “Avoid” Capital Gains Tax?

Short answer: no - a trust cannot lawfully avoid CGT on a real gain. The Australian Taxation Office (ATO) has specific anti-avoidance rules for trusts. However, trusts can help you:

• Distribute gains to beneficiaries who are better placed tax-wise (e.g. on lower marginal tax rates).
• Access the general 50% CGT discount (for assets held > 12 months) where eligible.
• Potentially qualify for the small business CGT concessions (subject to strict tests).
• Manage timing (within limits) by planning CGT events and distribution resolutions properly.

The difference between “avoidance” and “minimisation” matters. Setting up a trust with clear commercial purpose, following the deed, and making valid trustee resolutions is essential. Incorrect streaming, sham distributions, or failing to document decisions can undo any intended benefit and invite penalties.

Trust-Based CGT Strategies Small Businesses Commonly Consider

Here are practical, compliant ways business owners use trusts to manage CGT exposure. Treat these as conversation starters with your tax adviser and lawyer - the right path depends on your deed, structure and facts.

1) Using The 50% CGT Discount

Many trusts can pass the 50% CGT discount on to individual beneficiaries if the trust has held the asset for more than 12 months and other criteria are met. This effectively halves the taxable gain before it’s included in the beneficiary’s assessable income.

Companies don’t get the 50% discount. That’s one reason some founders hold business shares through a discretionary trust (or a unit trust held by a family trust), rather than directly in a company.

2) Streaming Capital Gains To Beneficiaries

Trusts can “stream” different classes of income (e.g. capital gains) to specific beneficiaries, if the trust deed allows it and the trustee makes valid resolutions by the required deadline. This lets you direct the capital gain to beneficiaries best placed to pay tax on it.

Streaming has to be done correctly. The deed needs appropriate streaming clauses and you must follow the ATO’s requirements for present entitlement and recording. If your deed is silent or outdated, consider a deed update before any sale event.

3) Leveraging Small Business CGT Concessions

Australia’s small business CGT concessions can significantly reduce or even eliminate CGT on the sale of active business assets if you satisfy tests like the $2 million turnover test or the $6 million net asset value test, and the “active asset” and “significant individual” requirements. A trust can access concessions if eligibility conditions are met at the trust and beneficiary levels.

Planning early helps. For example, confirming who the significant individuals are within your structure, and ensuring the asset qualifies as an active asset well before the sale, can be decisive. If you’re weighing up a share sale vs asset sale, get tailored advice - the concessions can apply differently depending on what exactly is being sold and who owns it.

4) Holding Business Shares Through A Trust

It’s common to hold company shares via a family trust (or have the family trust hold units in a unit trust that owns shares). This can support flexible distributions, asset protection and succession planning, and may optimise tax outcomes on a future sale of shares. We explore this approach in more detail in our guide to holding shares through a trust.

5) Timing The CGT Event And Resolutions

While you can’t arbitrarily “pick” a tax year, you often have some control over when a CGT event happens (e.g. the contract date vs settlement date for shares, noting CGT generally crystallises on contract). Aligning a sale with the right income year, and making timely trustee resolutions, can improve the overall tax result.

6) Managing Trust Losses And Family Trust Elections

Trust loss rules and family trust elections (FTEs) can impact whether you can distribute to certain beneficiaries or carry forward losses. If your trust makes an FTE, you commit to a specified family group for distribution purposes to access some tax rules. Get specific advice here - it’s a technical area with traps for the unwary.

7) Using In Specie Distributions (Where Appropriate)

Sometimes a trustee may distribute assets directly to beneficiaries instead of selling them (known as an in specie distribution). This can trigger its own CGT event, so it’s not a magical workaround - but in the right scenario, it can align ownership and tax outcomes with your longer-term plans. Read our explainer on in specie distribution to understand how it works legally.

8) Keeping Your Deed And Records Sale-Ready

Well before a sale, ensure your trust deed allows streaming and reflects your intended distribution powers, and that your trustee resolutions and beneficiary records are watertight. The ATO pays close attention to substance over form, so documentation and consistent conduct matter.

What Trust Structure Should I Use?

Structure drives tax outcomes and legal risk, so choose deliberately.

• Discretionary (Family) Trust: Offers flexibility to distribute capital gains across family beneficiaries. Good for many small businesses and investment holding.
• Unit Trust: Beneficiaries hold fixed units; distributions follow unit entitlements. Often used with unrelated co-investors or where fixed interests are required.
• Hybrid Approaches: Sometimes a family trust holds units in a unit trust that owns the operating company shares. This can balance flexibility with certainty among investors.

Your trust will need its own tax file number (TFN), bank account, and a robust trust deed that aligns with your goals. If you’re new to the administrative side, this overview of TFN and other identifiers for entities will help you map out the basics.

Selling Your Business Or Shares: Trust-Specific CGT Issues To Flag Early

When you’re planning an exit, the details determine the tax. A few common scenarios:

Selling Shares In Your Company

If your trust holds shares in a private company, a sale of those shares typically triggers CGT at the trust level. You’ll want to check eligibility for the general 50% discount and small business CGT concessions, and ensure your deed permits streaming the capital gain to specific beneficiaries.

There are additional steps and documents when executing a share sale (due diligence, warranties, completion mechanics). Our guide to a sale of shares outlines the key legal processes to expect.

Asset Sale Out Of The Operating Entity

With an asset sale, the operating entity sells the business assets (goodwill, equipment, IP, etc.). Tax effects differ from a share sale, and stamp duty may be a factor depending on the assets and state. The right choice depends on deal value, risk allocation, buyer preferences, and available concessions - see our comparison of share sale vs asset sale for a legal overview to discuss with your advisers.

Internal Reorganisations Before A Sale

Sometimes you’ll tidy your structure before a transaction, such as moving shares between related trusts or simplifying a multi-entity group. Transfers can be taxable events (and may require lender consent, third-party approvals and duty analysis). For private deals that don’t go through a public market, read our primer on off-market share transfers so you know the legal steps and documentation involved.

Setting Up And Running Your Trust Correctly

A great strategy falls over if the trust isn’t properly established or administered. Make sure you:

• Adopt a high-quality trust deed with appropriate streaming clauses and clear beneficiary definitions.
• Appoint a suitable trustee (corporate trustees are common for asset protection and continuity).
• Apply for the trust’s TFN and GST registration if relevant to your operations.
• Open a dedicated bank account and keep trust assets and records separate from personal assets.
• Make valid trustee resolutions before year-end to distribute income and capital gains, and keep minutes and beneficiary notices.
• Review your deed periodically - if your strategy changes, consider a deed update before any sale event (to avoid last-minute problems with streaming or beneficiary definitions).

If your trust holds shares in a company, align your company documents with your exit plan too - for instance, check your constitution and any Shareholders Agreement for pre-emption rights, tag/drag provisions and consent requirements that could affect timing and tax planning.

Common Pitfalls (And How To Avoid Them)

We regularly see the same issues jeopardise intended CGT outcomes. Keep these in mind:

• Outdated Deeds: If your deed doesn’t allow streaming, you might lose flexibility to direct capital gains as planned. Don’t wait until the deal is signed to check.
• Late Or Invalid Resolutions: Missed deadlines or poorly drafted resolutions can cause the trust to be taxed at the top rate on undistributed income.
• Distributions To Ineligible Beneficiaries: Be certain the recipient is a beneficiary under the deed and that any family trust election isn’t breached.
• Poor Recordkeeping: The ATO will expect to see clear records of CGT calculations, trust law steps and beneficiary notices - keep a clean file.
• No Commercial Rationale: Structures without commercial purpose risk Part IVA scrutiny (the general anti-avoidance rule). Always tether your set-up to real business reasons.

If the trust will hold the equity in your trading company for the long term, also think early about governance and exit mechanics with co-founders - a well-drafted Unitholders Agreement (for a unit trust) or Shareholders Agreement (for the company) can prevent disputes that derail deals.

Frequently Asked Questions About Trust Capital Gains Tax

Do Trusts Pay Capital Gains Tax?

A trust itself generally doesn’t pay tax if it distributes income to beneficiaries who are presently entitled. Capital gains made by the trust can be streamed to beneficiaries (if the deed allows), and those beneficiaries are then taxed on the gains - often with access to the 50% discount if they’re eligible individuals.

Is It Better To Sell Shares Or Business Assets If I Use A Trust?

It depends on your structure, buyer preferences, risk, and the availability of small business CGT concessions. A trust that holds company shares may favour a share sale; an operating entity may prefer an asset sale. Compare the legal and tax implications of a share sale vs asset sale early in your planning.

Can I Move Assets Between Related Trusts Before A Sale To Reduce Tax?

Transferring assets or shares can trigger CGT and duty, and certain integrity rules may apply. Internal reorganisations should be carefully planned and documented - if shares need to move, start by mapping the legal steps for off-market share transfers and get coordinated tax advice on timing and concessions.

What Registrations Does A Trust Need?

At a minimum, a trust will need its own TFN for tax purposes, and it may need an ABN and GST registration depending on its activities. Our overview of trust requirements explains how these identifiers work across different entity types.

Key Takeaways

• A trust won’t “avoid” CGT, but it can legally minimise and manage capital gains through streaming, the 50% discount and small business CGT concessions if eligibility conditions are met.
• The trust deed, valid trustee resolutions and accurate records are critical - if streaming isn’t allowed or resolutions are late, you can lose intended benefits.
• Plan your exit early. Decide whether a sale of shares or assets best suits your goals, and align your structure and documents to that pathway.
• Keep administration tight: separate bank accounts, a TFN, clean minutes, and beneficiary notices all support compliant distributions.
• Before any sale or internal restructure, consider legal steps like off-market share transfers and whether an in specie distribution makes sense in your scenario.
• The right structure (discretionary trust, unit trust, or hybrid) depends on your commercial goals, co-investors and exit plan - choose deliberately and document it well.

If you’d like a consultation on using a trust to manage capital gains tax for your small business or a planned exit, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.