Trusts 101 – A Guide to What They are and How They Work in Australia

Source: LegalVision

With all the talk about Total Super Balance caps and where people will invest money going forward if they can’t get it in to superannuation, the spotlight is being shone on “trusts” at present. This has also brought with it the claims of tax avoidance or tax minimisation, so what exactly are trusts and are there differences between Family Trusts, Units Trusts, Discretionary Trusts and Testamentary Trusts to name a few.

Trusts are a common strategy and this article aims to aid a better understanding of how a trust works, the role and obligations of a trustee, the accounting and income tax implications and some of the advantages and pitfalls. Of course, there is no substitute for specialist legal, tax and accounting advice when a specific trust issue arises and the general information in this article needs to be understood within that context.


Trusts are a fundamental element in the planning of business, investment and family financial affairs. There are many examples of how trusts figure in everyday transactions:

  • Cash management trusts and property trusts are used by many people for investment purposes
  • Joint ventures are frequently conducted via unit trusts
  • Money held in accounts for children may involve trust arrangements
  • Superannuation funds are trusts
  • Many businesses are operated through a trust structure
  • Executors of deceased estates act as trustees
  • There are charitable trusts, research trusts and trusts for animal welfare
  • Solicitors, real estate agents and accountants operate trust accounts
  • There are trustees in bankruptcy and trustees for debenture holders
  • Trusts are frequently used in family situations to protect assets and assist in tax planning.

Although trusts are common, they are often poorly understood.

What is a trust?

A frequently held, but erroneous view, is that a trust is a legal entity or person, like a company or an individual. But this is not true and is possibly the most misunderstood aspect of trusts.

A trust is not a separate legal entity. It is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. Not all countries recognise the concept of a trust, which is an English invention. While the trust concept can trace its roots back centuries in England, many European countries have no natural concept of a trust, however, as a result of trade with countries which do recognise trusts their legal systems have had to devise ways of recognising them.

The nature of the relationship is critical to an understanding of the trust concept. In English law the common law courts recognised only the legal owner and their property, however, the equity courts were willing to recognise the rights of persons for whose benefit the legal holder may be holding the property.

Put simply, then, a trust is a relationship which exists where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.

The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.

The nature of the trustee’s duty is often misunderstood in the context of family trusts where the trustees and beneficiaries are not at arm’s length. For instance, one or more of the parents may be trustees and the children beneficiaries. The children have rights under the trust which can be enforced at law, although it is rare for this to occur.

Types of trusts

In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:

  • Fixed trusts
  • Unit trusts
  • Discretionary trusts – Family Trusts
  • Bare trusts
  • Hybrid trusts
  • Testamentary trusts
  • Superannuation trusts
  • Special Disability Trusts
  • Charitable Trusts
  • Trusts for Accommodation – Life Interests and Rights of Residence

A common issue with all trusts is access to income and capital. Depending on the type of trust that is used, a beneficiary may have different rights to income and capital. In a discretionary trust the rights to income and capital are usually completely at the discretion of the trustee who may decide to give one beneficiary capital and another income. This means that the beneficiary of such a trust cannot simply demand payment of income or capital. In a fixed trust the beneficiary may have fixed rights to income, capital or both.

Fixed trusts

In essence these are trusts where the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such a case the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.

Unit trusts

These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company.

The beneficiaries are usually called unitholders. It is common for property, investment trusts (eg managed funds) and joint ventures to be structured as unit trusts. Beneficiaries can transfer their interests in the trust by transferring their units to a buyer.

There are no limits in terms of trust law on the number of units/unitholders, however, for tax purposes the tax treatment can vary depending on the size and activities of the trust.

Discretionary trusts – Family Trusts

These are often called “family trusts” because they are usually associated with tax planning and asset protection for a family group. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether anyone will receive income and/or capital and, if so, how much.

For the purposes of trust law, a trustee of a discretionary trust could theoretically decide not to distribute any income or capital to a beneficiary, however, there are tax reasons why this course of action is usually not taken.

The attraction of a discretionary trust is that the trustee has greater control and flexibility over the disposition of assets and income since the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.

Bare trusts

A bare trust exists when there is only one trustee, one legally competent beneficiary, no specified obligations and the beneficiary has complete control of the trustee (or “nominee”). A common example of a bare trust is used within a self-managed fund to hold assets under a limited recourse borrowing arrangement.

Hybrid trusts

These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the trustee has power to issue.

Testamentary trusts

As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often used when the testator wishes to provide for their children who have yet to reach adulthood or are handicapped.

Superannuation trusts

All superannuation funds in Australia operate as trusts. This includes self-managed superannuation funds.

The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.

The Federal Government has legislated to establish certain standards that all complying superannuation funds must meet. For instance, the “preservation” conditions, under which a member’s benefit cannot be paid until a certain qualification has been reached (such as reaching age 65), are a notable example.

Special Disability Trusts

Special Disability Trusts allow a person to plan for the future care and accommodation needs of a loved one with a severe disability. Find out more in this Q & A about Special Disability Trusts.

Charitable Trusts

You may wish to provide long term income benefit to a charity by providing tax free income from your estate, rather than giving an immediate gift. This type of trust is effective if large amounts of money are involved and the purpose of the gift suits a long term benefit e.g. scholarships or medical research.

Trusts for Accommodation – Life Interests and Right of Residence

A Life Interest or Right of Residence can be set up to provide for accommodation for your beneficiary. They are often used so that a family member can have the right to live in the family home for as long as they wish. These trusts can be restrictive so it is particularly important to get professional advice in deciding whether such a trust is right for your situation.

Establishing a trust

Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement. The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.

The person who transfers the property in a settlement is said to “settle” the property on the trustee and is called the “settlor”.

In practical terms, the original amount used to establish the trust is relatively small, often only $10 or so. More substantial assets or amounts of money are transferred or loaned to the trust after it has been established. The reason for this is to minimise stamp duty which is usually payable on the value of the property initially affected by the establishing deed.

The identity of the settlor is critical from a tax point of view and it should not generally be a person who is able to benefit under the trust, nor be a parent of a young beneficiary. Special rules in the tax law can affect such situations.

Also critical to the efficient operation of a trust is the role of the “appointor”. This role allows the named person or entity to appoint (and usually remove) the trustee, and for that reason, they are seen as the real controller of the trust. This role is generally unnecessary for small superannuation funds (those with fewer than five members) since legislation generally ensures that all members have to be trustees.

The trust fund

In principle, the trust fund can include any property at all – from cash to a huge factory, from shares to one contract, from operating a business to a single debt. Trust deeds usually have wide powers of investment, however, some deeds may prohibit certain forms of investment.

The critical point is that whatever the nature of the underlying assets, the trustee must deal with the assets having regard to the best interests of the beneficiaries. Failure to act in the best interests of the beneficiaries would result in a breach of trust which can give rise to an award of damages against the trustee.

A trustee must keep trust assets separate from the trustee’s own assets.

The trustee’s liabilities

A trustee is personally liable for the debts of the trust as the trust assets and liabilities are legally those of the trustee. For this reason if there are significant liabilities that could arise a limited liability (private) company is often used as trustee.

However, the trustee is entitled to use the trust assets to satisfy those liabilities as the trustee has a right of indemnity and a lien over them for this purpose.

This explains why the balance sheet of a corporate trustee will show the trust liabilities on the credit side and the right of indemnity as a company asset on the debit side. In the case of a discretionary trust it is usually thought that the trust liabilities cannot generally be pursued against the beneficiaries’ personal assets, but this may not be the case with a fixed or unit trust.

Powers and duties of a trustee

A trustee must act in the best interests of beneficiaries and must avoid conflicts of interest. The trustee deed will set out in detail what the trustee can invest in, the businesses the trustee can carry on and so on. The trustee must exercise powers in accordance with the deed and this is why deeds tend to be lengthy and complex so that the trustee has maximum flexibility.

Who can be a trustee?

Any legally competent person, including a company, can act as a trustee. Two or more entities can be trustees of the same trust.

A company can act as trustee (provided that its constitution allows it) and can therefore assist with limited liability, perpetual succession (the company does not “die”) and other advantages. The company’s directors control the activities of the trust. Trustees’ decisions should be the subject of formal minutes, especially in the case of important matters such as beneficiaries’ entitlements under a discretionary trust.

Trust legislation

All states and territories of Australia have their own legislation which provides for the basic powers and responsibilities of trustees. This legislation does not apply to complying superannuation funds (since the Federal legislation overrides state legislation in that area), nor will it apply to any other trust to the extent the trust deed is intended to exclude the operation of that legislation. It will usually apply to bare trusts, for example, since there is no trust deed, and it will apply where a trust deed is silent on specific matters which are relevant to the trust – for example, the legislation will prescribe certain investment powers and limits for the trustee if the deed does not exclude them.

Income tax and capital gains tax issues

Because a trust is not a person, its income is not taxed like that of an individual or company unless it is a corporate, public or trading trusts as defined in the Income Tax Assessment Act 1936. In essence the tax treatment of the trust income depends on who is and is not entitled to the income as at midnight on 30 June each year.

If all or part of the trust’s net income for tax purposes is paid or belongs to an ordinary beneficiary, it will be taxed in their hands like any other income. If a beneficiary who is entitled to the net income is under a “legal disability” (such as an infant), the income will be taxed to the trustee at the relevant individual rates.

Income to which no beneficiary is “presently entitled” will generally be taxed at highest marginal tax rate and for this reason it is important to ensure that the relevant decisions are made as soon as possible after 30 June each year and certainly within 2 months of the end of the year. The two month “period of grace” is particularly relevant for trusts which operate businesses as they will not have finalised their accounts by 30 June. In the case of discretionary trusts, if this is done the overall amount of tax can be minimised by allocating income to beneficiaries who pay a relatively low rate of tax.

The concept of “present entitlement” involves the idea that the beneficiary could demand immediate payment of their entitlement.

It is important to note that a company which is a trustee of a trust is not subject to company tax on the trust income it has responsibility for administering.

In relation to capital gains tax (CGT), a trust which holds an asset for at least 12 months is generally eligible for the 50% capital gains tax concession on capital gains that are made. This discount effectively “flows” through to beneficiaries who are individuals. A corporate beneficiary does not get the benefit of the 50% discount. Trusts that are used in a business rather than an investment context may also be entitled to additional tax concessions under the small business CGT concessions.

Since the late 1990s discretionary trusts and small unit trusts have been affected by a number of highly technical measures which affect the treatment of franking credits and tax losses. This is an area where specialist tax advice is essential.

Why a trust and which kind?

Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.

A trust can give some protection from creditors and is able to accommodate an employer/employee relationship. In family matters, the flexibility, control and limited liability aspects combined with potential tax savings, make discretionary trusts very popular.

In arm’s length commercial ventures, however, the parties prefer fixed proportions to flexibility and generally opt for a unit trust structure, but the possible loss of limited liability through this structure commonly warrants the use of a corporate entity as unitholder ie a company or a corporate trustee of a discretionary trust.

There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.

Trusts which incur losses

One of the most fundamental things to understand about trusts is that losses are “trapped” in the trust. This means that the trust cannot distribute the loss to a beneficiary to use at a personal level. This is an important issue for businesses operated through discretionary or unit trusts.

Establishment procedures

The following procedures apply to a trust established by settlement (the most common form of trust):

  • Decide on Appointors and back-up Appointors as they are the ultimate controllers of the trust. They appoint and change Trustees.
  • Settlor determined to establish a trust (should never be anyone who could become a beneficiary)
  • Select the trustee. If the trustee is a company, form the company.
  • Settlor makes a gift of money or other property to the trustee and executes the trust deed. (Pin $10 to the front of the register is the most common way of doing this)
  • Apply for ABN and TFN to allow you open a trust bank account

Establish books of account and statutory records and comply with relevant stamp duty requirements (Hint: Get your Accountant to do this)

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Leave a comment


  1. S Kinnison

     /  February 7, 2021

    Thank you Liam, great article, very informative!
    I do still find myself with a couple questions I’m hoping you might have time to answer..
    Could a trust be used to “protect” a property from getting divided (or involved) in process of splitting assets in case of a separation/divorce?
    If one of the divorcing parties (partner A) is neither trustee nor beneficiary can they still have claims to the property?
    On the questions above does it matter if the partner B is trustee or beneficiary or is the main point that the property in “in a trust”?
    Did I understand you correctly: a property can enter a trust even if it’s under a mortgage and that the trustee then is liable for the payment of debt?
    Lastly, does the beneficiary/-s have to be Australian?
    Im asking as I understand partnership is considered de-facto valid after just 6 months of living together in Australia, hence considering how to protect assets.

    appreciate your time and efforts!
    best regards


    • This is a really tough question as there are different rules for family courts in each state. Often, especially in NSW, the judge in the family court has the ability to look through all trust entities to consider all assets as part of the property settlement even if the other partner is neither a trustee or named beneficiary. Speak to a good lawyer as you may be able to combine use of a bloodline trust and a binding financial agreement to put some protection in place. Liam


  2. Helen Karafotias

     /  May 5, 2020

    How would you go about changing a Unit Trust Company into just a proprietary company, there are only 2 unitholders now. What steps can be taken if any.
    Your previous article was very informative.


    • You should talk to your accountant as shutting a Unit Trust and transferring assets to a Private Company would most likely involve CGT and transfer costs. You could either sell the assets down to cash and distribute them to the unit holders and then contribute them as capital to the private company of you could do it for some assets via an Off Market Transfer. If they are business assets then some states provide exemptions fro restructuring of a small business and you may also be able to use the Small Business CGT concessions. Tax advice and most probably legal advice would be essential before rushing in to this. You should also understand the pros and cons of moving structures.

      Here is a good comparison of the 2 options:


  3. Tom o’Hara

     /  January 25, 2019

    Can I close down my discretionary trust


    • You need to read the deed for the guidance on how to close your trust. You should get legal and tax advice on the consequences of winding up the trust

      Here is some more guidance from Cleardocs

      Why might a discretionary trust come to an end?

      A discretionary trust will usually have an expiry or ‘vesting’ date in the trust deed that is linked to the expiry of a certain number of years from establishment (limited to 80 years) or to the occurrence of a specific event (for example, the death of a certain person). You can read more about vesting dates and how to plan for them.

      Succession planning/generational change

      It is relatively straightforward to pass control of a discretionary trust through generations where, for example, the parents established the trust but retire or pass away. Of course, good estate planning is always required to ensure that the right outcomes are achieved and control passes without dispute.

      However, once under the control of the next generation, these parties may not have the same vision for the trust’s assets or future, or may, for example, agree with siblings to split their ‘interests’ and go their separate ways.

      Realisation of all the trust’s assets and/or the trust’s purposes having been fulfilled

      These circumstances often have in common the conversion of the trust’s assets from illiquid investments (such as a property or family business), or a specific investment such as a partnership interest or equity investment, to cash. Often in those circumstances the trustee may consider reinvestment. However, the trustee may also consult with stakeholders and decide it more prudent for those stakeholders to make future investments via clean vehicles, including because of the trust’s historical tax profile or trading position.

      Also, if a trust is maintained with only cash or minimal assets, the trustee is likely to continue incurring annual costs — such as accounting and tax services — for so long as the trust continues. Terminating the trust brings these requirements to an end. It also obviously brings to an end the trustee’s responsibility to appropriately invest those assets.

      Court order

      In some circumstances (for example, in the context of a family law dispute) a Court may make orders for the winding up of a discretionary trust.

      Joint decision of all the beneficiaries

      A trust may also come to an end where all the beneficiaries of the trust have the relevant legal capacity and make a decision to require the trustee to distribute the trust property to those beneficiaries. This is difficult in the context of a discretionary trust, but possible where there is a clear potential pool of eligible beneficiaries.

      Why is it important to validly terminate and wind up the trust?

      Whatever the circumstances of the trust’s termination, it is important that the trust is validly wound up. The main advantage is so that the trustee, beneficiaries and other stakeholders can be confident that assets have been realised, liabilities effectively dealt with, all taxes paid and all related matters catered for.

      What are the usual steps to terminate and wind up a discretionary trust?
      1. Review the trust’s deed: does it set out a process or key responsibilities, or contain default distribution clauses?

      The trustee will need to carefully consider the terms of the trust’s deed to confirm the powers and obligations placed on the trustee when distributing trust property (both income and capital) to beneficiaries. Often the trust deed will not contain specific obligations regarding termination of the trust. In those circumstances, the trustee still needs to:

      comply with its general obligations;
      act within its trustee powers; and
      consider how the exercise of its powers will be affected by the trust’s deed.
      For example, the Cleardocs discretionary trust deed:

      allows the trustee to bring forward the vesting or termination date for the trust (with the appointor’s consent, if there is one);
      allows the trustee, at any time before vesting and termination of the trust, to distribute all of the trust property to one or more of the eligible beneficiaries; and
      provides for default distributions of that trust property when the trust vests, unless the trustee has exercised its power to make specific distributions.
      Accordingly, the trustee should think carefully about the date it set as the vesting date, and ensure all relevant distributions are made before that date, unless the trustee is content for the default distribution clauses to apply.

      In some cases the trustee will also need to review the terms of other related instruments. For example, the terms of a Court order or, where the trust is terminated pursuant to an agreement executed by all the beneficiaries, the terms of that agreement (to the extent it is binding on the trustee).

      2. Engage with stakeholders

      The trustee will need to determine who the trust’s deed requires the trustee to consult with or seek approval from. For example, the Cleardocs discretionary trust deed requires that if the vesting day is to be brought forward then the trustee must obtain the appointor’s consent (if there is an appointor).

      Although beneficiaries do not technically have any control over, or the right to be consulted regarding, the winding up of the trust, it is advisable for the trustee to consult with beneficiaries to help avoid disputes in the future. This will also allow for the anticipated tax effects of distributions to different beneficiaries to be taken into account and for the distributions to be tailored accordingly.

      3. Identify beneficiaries and consider their eligibility to ensure that the trustee makes valid distributions

      The trustee will need to carefully assess the possible beneficiaries of the trust upon termination, and ensure that distributions are only made to eligible beneficiaries. Sometimes this will be very straightforward when the trustee only intends to make distributions to named beneficiaries. In other cases, some trust deeds (not the Cleardocs deed) may refer to only certain classes of beneficiaries receiving capital, and a wider or narrower class receiving income.

      Where there is any ambiguity, a trustee may apply to a Court for leave to distribute trust property.

      The trustee should also carefully consider the timing and appropriate recording of all decisions to distribute the income and capital of the trust as part of the winding up process.

      4. Consider and seek advice about the financial and tax implications of winding up the trust

      The tax and other financial consequences of distributing trust property upon termination are often the most complex considerations and require careful planning in order to avoid unfavourable and unintended outcomes.

      For instance, if trust property includes land then duty would normally be payable on the distribution, subject to the availability of duty exemptions for discretionary trusts.

      In all cases, professional advice should be sought about the most effective and efficient distribution of trust property to avoid unexpected stamp duty, capital gains or other tax or transfer implications. To support its decisions and provide certainty of those outcomes, the trustee should compile complete final accounts for the trust and ensure that all the trust’s final tax and accounting obligations are fulfilled.

      5. Realise the trust’s assets

      This step will be largely influenced by consultations with stakeholders and professional advisers as to the best financial and tax outcomes for the trust and its beneficiaries. The trustee will need to plan carefully in relation to the appropriate timing and formalities for realising the trust’s assets.

      6. Extinguish all the remaining debts and liabilities

      All the trust’s liabilities must be fully discharged (or a suitable amount held in reserve) before the trustee distributes the trust property to the beneficiaries.

      Where this does not occur, the trustee may find itself liable for the trust’s debts without the possibility of being repaid from the trust’s assets.

      7. Maintain complete and detailed records of the winding up

      Accurate and detailed records of the actions taken to wind up the trust will help avoid any future ambiguities and can be used to provide the trustee, the beneficiaries and any third parties with an accurate picture of the final state of affairs of the trust. Diligent record-keeping will also help the trustee to ensure it has evidence of having fulfilled its duties upon termination of the trust.

      When will the winding up be complete?
      In cases where the trust is brought to an end through the exercise of a power to terminate, the trustee’s duties and powers continue to exist for a reasonable period to allow the trustee to protect the trust assets and to wind up the trust.

      Where a trustee has fulfilled all its obligations and the trust property has been wholly administered (distributed or used to discharge trust liabilities so that there is no remaining trust property), the trust will be considered to have come to an end.


  4. Frank Bentler

     /  November 28, 2018

    Yes. How do we get in contact?


  5. Owen Rask

     /  August 1, 2017

    Great write-up Liam. Very comprehensive, you covered all bases nicely.



Let us know what you think? Have you got a question based on the article? Let me know

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: