What Is a Discretionary Trust and How Can It Benefit Your Business?

Discretionary trusts are a popular way to hold investments and run small businesses in Australia. They’re flexible, can support wealth protection, and may offer tax planning advantages - but there are important rules to follow, and the details matter.

In this guide, we’ll break down what a discretionary trust is, how it works, when it can help (and when it might not), what’s involved in setting one up, and the key tax and legal documents to consider. By the end, you’ll have a clear, practical picture of whether this structure could suit your goals - and the next steps to take if it does.

What Is a Discretionary Trust?

A discretionary trust is a legal arrangement where a trustee holds and manages assets for a group of potential recipients called beneficiaries. What makes it “discretionary” is the trustee’s power to decide how and when trust income or capital is distributed among beneficiaries each year (unlike a fixed or unit trust, where entitlements are set in advance).

You’ll often hear discretionary trusts referred to as “family trusts” because they’re commonly used to manage family wealth or run family businesses. They can hold a wide range of assets - shares, cash, intellectual property, real estate, or even the shares in a trading company. The rules that govern the trust are set out in a formal legal document called a trust deed. Because a deed is a special type of binding instrument in Australian law, many founders like to understand what a deed does before they sign - if you’re in this camp, a quick primer on what a deed is under Australian law can help.

How a Discretionary Trust Works (The Moving Parts)

• The Trust Deed: This document sets the rules - who can be a beneficiary, what powers the trustee has, how distributions are made, and how (and when) the trust can be varied or wound up.
• The Trustee: The trustee controls and administers the trust. This can be one or more individuals, but many people prefer a corporate trustee (a company acting as trustee) to help separate personal and trust liabilities and make succession smoother.
• The Beneficiaries: The deed usually defines a family group (for example, the primary beneficiary and their spouse, children, companies or trusts they control, and future descendants). Beneficiaries do not “own” trust assets; they may be considered for distributions at the trustee’s discretion.
• The Appointor/Principal (if included): Some deeds include an “appointor” with the power to hire or remove the trustee. Control of this role is a key element in who effectively controls a trust day to day.

In practice, the trustee manages the assets and decides before 30 June each year how the income and (where the deed allows) any capital gains or franked dividends will be distributed. That decision is usually documented in a trustee resolution or minute and, if the trust streams different “classes” of income, the deed needs to specifically permit this and the paperwork must be done correctly and on time.

Benefits (and Risks) for Business Owners

Discretionary trusts can be powerful, but they’re not a one‑size‑fits‑all solution. Here are the common advantages and the key caveats to consider.

Key Benefits

• Flexibility: The trustee can adjust distributions year to year to reflect changes in family or business circumstances.
• Asset Protection: Beneficiaries don’t legally own trust assets, which can assist with risk management if a beneficiary faces bankruptcy or litigation (asset protection depends on your circumstances and the timing of contributions - trusts cannot be used to defeat creditors).
• Succession Planning: A trust can help keep family wealth within a defined group over generations, with clear rules for who controls the trustee and appointor roles over time.
• Business Structuring: You can run a trading business through a trust (often with a corporate trustee) and distribute profits to eligible family members or related entities where appropriate and permitted by law.

Common Risks and Misconceptions

• Administration Is Ongoing: Annual distribution resolutions, careful record keeping, and compliance with the trust deed are essential. Missing deadlines can have tax consequences.
• Control Needs Planning: If you are not the trustee or appointor, you may have little practical control over trust assets. Ensure the deed, appointor provisions, and corporate trustee ownership align with your intentions, including “who holds control” considerations under the Corporations Act (see control under the Corporations Act).
• Financiers Scrutinise Trusts: Banks often ask for the trust deed, resolutions, and financials and may require personal guarantees.
• Rule Changes Happen: Trust tax rules evolve. Settle the structure correctly and review it periodically with your advisers.

Step‑By‑Step: Setting One Up in Australia

Getting the setup right at the start saves cost and headaches later. Here’s the typical sequence.

1. Map Your Objectives: Are you protecting assets, planning succession, or operating a trading business? Clarity on purpose drives the deed terms and control settings.
2. Choose the Trustee: A company as trustee is common for liability and succession reasons. If you go this way, you’ll need to establish the company first (ACN, directors, shareholders) - this can be handled as part of your company set up.
3. Draft and Execute the Trust Deed: The deed should be tailored - beneficiaries, distribution powers (including streaming), appointor provisions, and variation powers should reflect your goals. The deed is signed as a deed (special execution requirements apply) and dated.
4. Settle the Trust: A nominal settled sum is paid by an independent settlor (not a beneficiary) to bring the trust into existence.
5. Register for Tax: Most trusts obtain a TFN and, where they carry on an enterprise, an ABN. If projected turnover will exceed the GST threshold, register for GST. For a practical overview of these IDs in the trust context, see trust requirements (ACN, ABN, TFN).
6. Open a Bank Account: Open a dedicated account in the trustee’s capacity as trustee for the trust (to keep funds separate from personal or other entities).
7. Check Stamp Duty Position: Duty on establishing a trust deed has been abolished in several states and territories, while limited duties may still apply in others or when transferring dutiable property into a trust. Confirm the current rules in your jurisdiction before or shortly after execution.
8. Put Your Operating Contracts in Place: If the trust will trade, line up your customer terms and key supplier contracts before launch (more on the documents below).

Tip: If you intend to “stream” capital gains or franked dividends, the deed must permit it and your annual resolutions must be done correctly and on time. Build this into your year‑end process from day one.

Tax Considerations You Should Not Ignore

Discretionary trusts offer distribution flexibility, but Australian tax rules around trusts are detailed and strictly enforced. This section highlights key issues to discuss with your tax adviser. Sprintlaw provides legal assistance with trust deeds and governance; we don’t provide tax advice.

Distributions and Annual Resolutions

• Who Is Taxed: Generally, beneficiaries are taxed on the share of trust income they are “presently entitled” to at their own marginal rates. If no beneficiary is presently entitled by 30 June, the trustee may be assessed at the top marginal tax rate for that income.
• Minors: Distributions of passive income to individuals under 18 can be taxed at penalty rates under Division 6AA (with limited exceptions). Planning is critical here.
• Streaming CGT and Franked Dividends: To stream these components, your deed must specifically allow it and you must make valid streaming resolutions on time with proper records. If not, those amounts may be treated as part of general trust income.

Anti‑Avoidance and Common Traps

• s 100A (Reimbursement Agreements): Arrangements where a distribution is made to one person but the economic benefit flows to someone else (for example, adult children on paper, but funds used by parents) can be attacked by the ATO. Get advice before finalising distributions that look like this.
• Division 7A (Company Beneficiaries): Unpaid present entitlements to a private company beneficiary can trigger Division 7A unless placed on a complying sub‑trust or loan terms. Your accountant should help you manage this.
• Family Trust Elections: Electing to be a “family trust” can unlock certain concessions and loss‑tracing benefits, but it also restricts who you can distribute to without incurring family trust distribution tax. Consider whether a Family Trust Election (and any interposed entity elections) is appropriate for your group.

Because the tax outcomes depend on your deed terms and your group’s facts, it’s best to involve your accountant early each year, align on your distribution strategy, and ensure all trustee resolutions and records are completed correctly before 30 June.

Essential Documents and Winding Up

Trusts rely on clear paperwork - both to operate day to day and to stand up to scrutiny from banks, partners and the ATO. Here’s what most business‑active trusts will need.

Core Trust and Governance Documents

• Trust Deed: The foundation that sets the powers and rules.
• Trustee Minutes/Resolutions: Annual distribution resolutions and any decisions around streaming, changes of trustee, admitting or excluding beneficiaries, or dealing with major assets.
• Variations: If your deed needs updating (for example, to enable streaming or adjust appointor provisions), a formal variation is required. This is commonly documented by a Deed of Variation in line with your current deed’s variation power.
• Corporate Trustee Records: If you use a company as trustee, maintain its registers and keep its Company Constitution and ASIC details in order.

Commercial Contracts for Trading Trusts

• Customer Terms/Service Agreement: Set out scope, pricing, liability and payment terms for your clients - a tailored Service Agreement keeps expectations clear and risk managed.
• Supplier or Contractor Agreements: Lock in quality, timelines, pricing and IP ownership when you rely on others to deliver.
• Privacy Policy: If you collect personal information (online or offline), publish and follow a compliant Privacy Policy.
• Employment Contracts and Policies: If you hire staff, use proper Employment Contracts and workplace policies and comply with the Fair Work system.

How to Wind Up a Discretionary Trust

When it’s time to end a trust, take a structured approach to avoid unexpected tax or duty:

1. Review the trust deed for wind‑up provisions and any consent requirements.
2. Settle liabilities and final tax obligations, including BAS and PAYG where relevant.
3. Distribute remaining assets to beneficiaries in line with the deed and document the decisions.
4. Prepare and lodge the final trust tax return and cancel registrations (ABN/GST) if applicable.
5. Execute a deed of termination and keep a complete file of closing records.

Be mindful that transferring property out of a trust as part of a wind‑up can trigger capital gains tax and, depending on the asset and jurisdiction, may attract duty. Coordinate with your tax adviser before implementing the final steps.

Key Takeaways

• A discretionary trust is a flexible structure where a trustee decides how to distribute income and capital among beneficiaries each year.
• Common benefits include flexible distributions, asset protection and succession planning - but strong governance and timely paperwork are critical.
• Consider a corporate trustee for clearer liability separation and smoother succession, and pay close attention to who controls the appointor role.
• Get the setup right: a tailored deed, appropriate registrations (TFN/ABN/GST), and well‑drafted operating contracts help your trust trade confidently.
• Tax rules around distributions, streaming, minors, s 100A and Division 7A are complex - involve your accountant early and keep meticulous records.
• If your deed needs updating over time, use a formal deed variation and maintain your trustee company’s records alongside your trust minutes.

If you’d like a consultation on discretionary trusts for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.