"Family trust" is not a legal category you register. It's the everyday name for a discretionary trust set up to benefit one family. The trustee holds the assets and, each year, chooses which family members get the income and how much. Nobody owns the trust's assets personally, which is the source of both its tax flexibility and its protection.
This guide covers how a family trust actually works, who really controls it, how it's taxed, the rules that catch people out, the proposed 2028 changes, and what it costs. It's written for owners who want to understand what they're signing, and it should still satisfy the accountant who reads it over their shoulder.
What is a family trust, in plain English?
Think of a family trust as a legal box with a rulebook.
- The box holds assets: shares in your trading company, an investment portfolio, a business, property.
- The rulebook is the trust deed. It says who runs the box, who can receive money from it, and how decisions are made.
- The trustee is the person or company that legally owns what's in the box and must manage it for the beneficiaries, following the deed.
- The beneficiaries are the people (and entities) who may receive income or capital. In a discretionary trust, no beneficiary is entitled to anything until the trustee decides.
That last point is the whole idea. Because the trustee has discretion, profit can go to whoever in the family it suits best each year, and because no beneficiary owns anything until a decision is made, a beneficiary's creditors usually have nothing to grab.
How does a family trust work?
Five roles matter. Most people only know about two of them.
| Role | What they do | What to watch |
|---|---|---|
| Settlor | Signs the deed and gives the starting sum (often $10 or $20) to create the trust | Should not be a beneficiary or anyone who will benefit. Usually an independent person |
| Trustee | Legally owns the assets, signs contracts, makes the yearly distribution decisions, lodges the tax return | Can be individuals or a company. A company is usually better (see below) |
| Appointor (or principal) | Can remove and replace the trustee | This is the real power. Whoever holds it controls the trust |
| Beneficiaries | Can receive income or capital at the trustee's discretion | Defined by the deed, usually wide: a named family plus relatives, related companies and trusts |
| Guardian (some deeds) | Must consent to certain trustee decisions | Not in every deed. Can add a useful check, or a deadlock |
How the money moves each year
- The trust earns income during the year: business profit, dividends, rent, interest, capital gains.
- By 30 June, the trustee makes a written resolution deciding which beneficiaries are entitled to the year's income. Capital gains can be dealt with a little later (within two months) if the deed allows, but income can't. Our guide to trust distributions and section 100A covers the resolution in detail.
- After year end, the accounts are prepared and the trust lodges its tax return, showing each beneficiary's share.
- Each beneficiary includes their share in their own tax return and pays tax at their own rate.
- The trustee pays the money out, or records it as owed to the beneficiary (an "unpaid present entitlement").
Why a company as trustee is usually better
Individual trustees are personally liable for the trust's debts, and every time a trustee changes, every asset title, bank account and share register has to be updated. A company trustee (often called a corporate trustee) limits personal liability and survives death and departures without changing who owns what. One company should act as trustee for one trust only. If the same company is trustee of a trading trust and an asset-holding trust, trading creditors can reach the assets through the trustee.
Who actually controls a family trust?
The appointor. The trustee runs the trust day to day, but the appointor can sack the trustee and appoint a new one. If you want to know who controls a family trust, read the appointor clause first.
Three things follow from that.
- Succession. Most deeds let the appointor name a successor, often in their will. If nobody's named, control can pass to the appointor's legal personal representative, which may not be who you'd choose. Plan this alongside your will. Our guide to testamentary trusts explains how wills and trusts fit together.
- Separation. Family courts look at who controls a trust, not just who's named as a beneficiary. In 2026 the Full Court of the Federal Circuit and Family Court treated inherited family trusts as part of a husband's property because he shared control of them as co-appointor. If wealth is passing to a child, think hard about whether that child should hold control alone. More in our guide to trusts and family law.
- Changing control. You can only change the appointor, or anything else, if the deed's variation power allows it. Courts have struck down variations where the power was worded too narrowly. A solicitor should check the exact words before anything is signed.
Watch out: Lost the original signed deed? That's a real problem. Banks, the ATO and solicitors will ask for it, and rebuilding the record is slow and expensive. Find it, scan it, and store the original safely.
How is a family trust taxed?
The trust is a pass-through. In most years the trust itself pays no income tax, because the beneficiaries are taxed on what they're entitled to. The exceptions are where the tax bites.
The main rules
| Situation | How it's taxed |
|---|---|
| Income distributed to an adult resident beneficiary | At that beneficiary's personal rates (2026–27: tax-free to $18,200, top rate 45% over $190,000, plus Medicare levy) |
| Income not distributed (no valid resolution by 30 June) | The trustee pays tax at the top rate, 47% with the Medicare levy component |
| Income distributed to a child under 18 | Penalty rates on unearned income. On the ATO's latest published rates (2025–26), nil up to $416, 66% of the excess up to $1,307, then 45% of the whole amount |
| Income distributed to a company beneficiary ("bucket company") | Company rate, usually 30% for passive income. Getting money back out later raises Division 7A and dividend tax. See our bucket company guide |
| Capital gains | Can pass through with the CGT discount to individual beneficiaries. From 1 July 2027, the discount is replaced by indexation for growth from that date (this is law) |
| Franked dividends | Franking credits pass to beneficiaries, if the trust meets the holding period rules (a family trust election usually helps) |
| A trading or investment loss | Stays in the trust. Losses can't be distributed |
Section 100A: the rule that matters most
Section 100A is the ATO's main weapon against distributions that are made to one person on paper while the money actually goes to someone else. If a beneficiary's entitlement is part of an arrangement where the benefit is really enjoyed by another person, and the arrangement wasn't an ordinary family or commercial dealing, the beneficiary is treated as never having been entitled. The trustee is then taxed at 47% on that income. There is no time limit on the ATO amending assessments for section 100A.
The ATO's guidance sorts arrangements into zones:
- Green zone (low risk): for example, the beneficiary actually receives the money and uses it for their own benefit, or it's retained in the family group in ways the ATO has accepted.
- Red zone (the ATO will look closely): for example, an adult child is made entitled, pays tax at a low rate, and the money is handed back to the parents or used to pay the parents' bills or loans.
- White zone: arrangements entered before 1 July 2014, which the ATO generally won't review unless they're already under examination.
Distributing to your 20-year-old university student isn't wrong. Distributing to them while Mum and Dad keep the money is where the risk lives. Read the ATO's section 100A guidance on reimbursement agreements or our own guide, linked above.
Trustees must genuinely consider the beneficiaries
Trust law adds a separate test. A trustee who signs the same resolution every year without considering the needs of the eligible beneficiaries can have distributions challenged and be removed. A Victorian Court of Appeal decision in 2022 did exactly that where adult beneficiaries were ignored. Keep a short written record of what the trustee considered before signing each 30 June resolution.
What is a family trust election, and should you make one?
A family trust election (FTE) is a choice the trustee makes, in writing on the ATO's form, to have the trust treated as a "family trust" for tax purposes. The trust names one person, the test individual, and the election ties the trust to that person's family group. Calling your trust "the Smith Family Trust" doesn't make it one for tax purposes. Only the election does.
Why make one:
- Easier access to trust losses and bad debt deductions, because only a modified income injection test applies.
- Franking credits on shares held through the trust become easier to claim, because beneficiaries can meet the holding period rule.
- Exclusion from trustee beneficiary reporting.
- Access to some restructure concessions.
What it costs you:
- Any distribution to someone outside the test individual's family group triggers family trust distribution tax at 47% of the amount distributed. That includes distributions to companies or other trusts that haven't made an interposed entity election.
- The election is very hard to revoke, and once revoked it can never be made again for that trust.
- The family group is fixed around one person and their family as the tax law defines it. In-laws, partners and other entities can fall outside it, and that gets harder to manage as the family grows.
Who is inside the family group, and who isn't?
This is where most election problems start, so it pays to know the definition before you distribute. The family of the test individual covers:
| Inside the family | Outside the family |
|---|---|
| The test individual and their spouse | Aunts and uncles |
| Parents, grandparents, brothers and sisters (theirs and their spouse's) | Cousins |
| Children, nephews and nieces (theirs and their spouse's), and their descendants | Friends, business partners and unrelated unitholders |
| Spouses of any of the people above | A company or trust whose shareholders or beneficiaries include outsiders, unless it qualifies |
Other family trusts that name the same test individual sit inside the group, as do companies, partnerships and trusts that make an interposed entity election to join it. A former spouse leaves the "family" after a separation but generally stays inside the wider family group, so distributions to them don't automatically trigger the tax.
Three details catch trustees out:
- "Distribution" is wider than a trust distribution. An interest-free loan, a forgiven debt or an asset transferred below market value to someone outside the group can all count. Reasonable wages and super for real work don't.
- The tax is due 21 days after the distribution, and interest runs from 60 days after that, whether or not anyone has noticed. Problems found years later can carry interest larger than the tax itself.
- Succession plans can fall outside the group. If your adult child sets up their own trust naming themselves as the test individual, distributions from your trust to theirs can be caught. Choosing the test individual for a new trust is a decision for the whole family, not just today's.
An election can be varied only once, and only to someone who was a family member of the original test individual. Revocation is available in limited cases and only within a few years of the election, so treat it as close to permanent.
Key point: If your trust may have made distributions outside the family group in past years, the ATO says it may remit up to 80% of the interest charge on family trust distribution tax where you review it yourself, lodge the payment form and pay the tax, up to 31 December 2026. After the ATO starts a review, that offer generally falls away.
Our family trust election agent works through the family group, interposed entity elections and any past exposure; your accountant reviews it and decides what to lodge.
What is the proposed 2028 tax on family trusts?
This is a Bill, not law. On 14 October 2026 the Government introduced the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026. As introduced, it proposes:
- A 30% minimum tax on the taxable income of discretionary trusts, paid by the trustee, from 1 July 2028.
- Non-refundable credits for beneficiaries for the tax the trustee pays. Company beneficiaries don't get the credit.
- Exclusions for fixed trusts, charitable trusts, special disability trusts, super funds, deceased estates and genuine testamentary trusts, and for primary production income and certain income of vulnerable minors.
- Rollover relief for three years from 1 July 2027 for families who restructure out of a discretionary trust into, for example, a company or fixed trust.
- An election that exempts a trust which nominates its beneficiaries upfront and keeps distributing to them.
The Bill may change before it passes, or may not pass. We're modelling it for every trust client, but we won't restructure anyone on the strength of a Bill. Restructuring early can trigger CGT and stamp duty you didn't need to pay. Our guide to the discretionary trust tax changes tracks where it's up to.
Worked example: what a family trust does to the tax bill
Hypothetical, rounded, 2026–27 resident rates.
Say a family trust owns the shares in a family company and the trust receives $150,000 of net income this year. Alex already earns a salary over $190,000. Sam, Alex's spouse, has no other income. Their daughter Jo is 20, at university, with no other income.
Option 1: everything to Alex. Alex pays the top rate plus Medicare levy, 47%, on the full $150,000.
Option 2: split between Sam and Jo. Sam receives $105,000 and Jo receives $45,000, and each genuinely receives and uses their money.
| Option 1: all to Alex | Option 2: Sam and Jo | |
|---|---|---|
| Alex | $70,500 | $0 |
| Sam ($105,000) | — | $24,120 |
| Jo ($45,000, after low income tax offset) | — | $4,595 |
| Family tax on the $150,000 | $70,500 | $28,715 |
That's a difference of about $41,800 a year. It's why family trusts are popular, and why the ATO watches them. Option 2 only works if Jo's $45,000 is really hers. If it goes into Alex and Sam's mortgage, it's a red-zone arrangement under section 100A and the trustee could be taxed at 47% on it.
If the 2028 Bill passes as introduced, the trustee would pay 30% on the $150,000, which is $45,000, and Sam and Jo would get non-refundable credits for it. Their own tax ($24,120 and $4,595) is less than the credits, so they'd pay nothing more, but the excess credits are lost. The family's tax would be about $45,000 instead of $28,715. Option 1 would still cost $70,500. The trust would still save money in this example, about $25,500 instead of $41,800, but the gap narrows a lot. Families distributing mostly to retirees, students and non-working spouses lose the most. How the credits interact with the Medicare levy and the upfront-nomination election will depend on the final law.
Family trust pros and cons
| Pros | Cons |
|---|---|
| Income can be shared across the family each year, at each person's rate | Annual resolutions by 30 June, and penalty tax if you miss them |
| Beneficiaries don't own the assets, which helps protect against a beneficiary's creditors | Integrity rules (section 100A, family trust distribution tax) carry 47% outcomes |
| Capital gains can pass through with the CGT discount (subject to the 2027 changes) | Losses are trapped in the trust |
| Survives death; control passes under the deed, outside the will | Not automatically protected in a separation if you control it |
| Flexible: can own a business, shares in a company, property or investments | Usually no main residence exemption, and some states charge trusts more land tax |
| Can make the business easier to pass on or sell | Proposed 30% minimum tax from 1 July 2028 (not law yet) |
| More setup and running costs than holding assets personally |
How much does a family trust cost to set up and run?
We don't quote a single figure, because it depends on what the trust will hold and how complex the group is. Here's what you'll be paying for.
Setting up
- The trust deed, prepared by a solicitor or a deed provider, and the advice on how it should be drafted
- A company to act as trustee, if you use one, including ASIC's registration fee
- Tax file number and, if needed, ABN and GST registration (free from the government)
- A bank account in the trustee's name
- Stamp duty and CGT if existing assets are transferred in. This is often the biggest cost and the one people forget
Running it each year
- Bookkeeping, financial statements and the trust tax return
- The 30 June distribution resolution and supporting minutes
- ASIC's annual review fee for the trustee company (check the current amount on ASIC's fees page)
- State land tax if the trust holds property. Trusts often get a lower threshold. In Queensland for 2026–27, for example, land tax starts at $350,000 of taxable land for trustees, against $600,000 for individuals
At BPAG, an ongoing trust usually sits inside your fixed-price plan alongside your company and personal returns. See our pricing, or have us prepare your trust tax return as part of the group.
Do you actually need a family trust?
| If this describes you | Our usual view |
|---|---|
| Profitable business, spouse or adult children on lower incomes, assets worth protecting | A family trust is often worth it, usually owning the shares in a trading company |
| You carry professional or business risk and hold investments in your own name | Worth modelling, especially before the 30 June 2027 changes. See our guide to the 30 June 2027 tax changes |
| Single salary earner, no business, modest investments | Usually not. The cost and rules outweigh the benefit |
| Investing with unrelated partners who each want a fixed share | A unit trust or company is usually better |
| Main goal is to protect a child's inheritance from their future divorce or creditors | Look at a testamentary trust in your will as well, or instead |
| Every beneficiary is already on the top tax rate | The tax case is weak. The protection and succession case may still stand |
Not sure where you land? Our guide to sole trader vs company vs trust compares the options side by side.
Mistakes we see with family trusts
- No resolution by 30 June, or a resolution written after the fact. The trustee can end up paying 47% on the lot.
- Distributing to someone who isn't a beneficiary under the deed. It happens more than you'd think, especially with partners and in-laws.
- Paper distributions to adult children while the parents keep the money.
- Distributions to kids under 18, taxed at penalty rates for little benefit.
- Distributing outside the family group after making a family trust election, often to a company or another trust without an interposed entity election.
- One trustee company for a trading trust and an asset trust, so the trading risk reaches the assets.
- No plan for the appointor's death, leaving control to the estate by default.
- Large unpaid entitlements owed to a bucket company for years. A 2026 High Court decision changed how these are treated under Division 7A, but section 100A and other integrity rules still apply. Have them reviewed.
- Treating the trust's bank account like a personal one. It muddies the records, and it can undermine the protection the trust is meant to give.
- Forgetting the vesting date until it's a few years away.
How BPAG helps with family trusts
Most of our business clients have at least one trust in their group, so this is everyday work for us.
- Setting up a trust that fits the rest of your structure. Our family trust setup service covers the advice, the solicitor's brief and the registrations.
- Reviewing an existing trust. Our trust deed agent summarises the deed and flags issues with powers, appointors, beneficiaries and the vesting date. Your accountant reads the deed and confirms what matters.
- Distributions every year. Our trust distribution resolution agent drafts the 30 June resolution with the deed's powers and the risk flags checked. Your accountant reviews it, and you sign it on your phone.
- The bigger picture. If the trust is one part of a wider plan to protect a business, a home and investments, start with our business structuring and asset protection service.
The agents draft. A qualified accountant reviews and signs off every piece of advice, and nothing goes to you or the ATO without a person approving it. Trust deeds and deed variations are prepared by your solicitor, and we brief them directly.
Frequently asked questions
Can a family trust distribute losses to beneficiaries?
No. A trust can distribute income, but not losses. If the trust makes a loss, it stays in the trust and can be carried forward against future trust income, provided the trust loss rules are met. Making a family trust election makes those loss rules easier to satisfy.
Does a family trust need an ABN and its own tax return?
A family trust needs its own tax file number and lodges its own trust tax return every year, even when all the income is distributed. It needs an ABN only if it carries on an enterprise, such as running a business or renting out commercial property. If it runs a business with GST turnover of $75,000 or more, it also needs to register for GST.
Can a family trust own the family home?
It can, but there's a cost. A home owned by a discretionary trust generally doesn't get the main residence CGT exemption, and some states charge trusts land tax at lower thresholds or higher rates. For most families the home is better held by the lower-risk spouse, but there are exceptions worth modelling.
What happens to a family trust when someone dies?
The trust doesn't die with the person, because it isn't owned by anyone personally. Control passes according to the deed, usually to a successor appointor named in the deed or in the appointor's will. If the deed doesn't deal with this clearly, control can end up with someone you didn't intend, so check the succession clauses now.
How long does a family trust last?
Most deeds set a vesting date, often up to 80 years from setup. On that date the trust ends and the assets pass to beneficiaries, which can trigger CGT and stamp duty. If your trust is approaching its vesting date, talk to us and a solicitor early, because extending it is only possible if the deed allows it.
Can I set up a family trust myself online?
You can buy a deed online, and the deed itself isn't the expensive part. The risk is in the choices: who the trustee and appointor are, who can benefit, whether a corporate trustee is needed, and how the trust fits with your company, will and super. Getting those wrong costs far more than advice does.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.