How a Family Trust Works: Tax, Distributions and Running Costs

What is a family trust?

In tax law, a family trust is a trust whose trustee has made a family trust election. According to the Australian Taxation Office (ATO), a trust is not a family trust for tax purposes simply because the words "family trust" are in its name. The trustee has to take the active step of making the election.

A trust itself is an obligation on a person or other entity, called the trustee, to hold property for the benefit of beneficiaries. The ATO explains that in legal terms a trust is a relationship rather than a legal entity, although trusts are treated as taxpayer entities for tax administration.

The Government's budget material uses the phrase "family discretionary trust". In a discretionary trust, beneficiaries can acquire an entitlement because the trustee exercises a discretion to pay them income or capital. So "family trust" and "discretionary trust" overlap but are not the same thing: a discretionary trust only has family trust status for tax once the election is made.

This guide is general information about how the rules work as at 4 November 2026. It does not say whether a trust suits any particular reader.

How a family trust is set up: a deed, a trustee and tax registrations

Setting up a family trust takes a formal trust deed, a trustee and separate tax registrations. business.gov.au describes trusts as complex to set up and says it is best to see a qualified, licensed professional. The usual pieces are:

1. Advice first. business.gov.au says to seek advice from a professional business adviser, lawyer or accountant before registering as a trust.
2. A trustee. A trustee can be a person or a company, and there can be more than one. According to the ATO, the trustee may also be a beneficiary, but not the sole beneficiary unless there is more than one trustee.
3. A deed. Trust structures require a formal deed that outlines how the trust operates. The trustee must deal with trust property in line with the intentions set out in that deed.
4. Registrations. A trust should have its own tax file number, and is entitled to an Australian business number (ABN) if it carries on an enterprise. The trustee registers these in their capacity as trustee, separately from their own registrations.
5. GST and employer checks. The ATO says a trust must register for goods and services tax (GST) at annual GST turnover of $75,000 or more, and a trustee carrying on a business may have employer obligations.
6. The election decision. A family trust election is a voluntary step, covered in its own section below.

How income moves through a trust each year: the 30 June resolution decides who is taxed

A beneficiary is generally taxed on their share of the trust's net income, based on the share they are presently entitled to, regardless of when or whether the money is paid to them. The ATO says a beneficiary is presently entitled where, by the end of the year, they have a present or immediate right to demand payment from the trustee. The ATO's resolutions checklist is written for trustees who create that entitlement by resolution. A typical year runs like this:

1. Check the deed. The checklist asks trustees to hold a complete copy, including amendments, and confirm the intended beneficiaries can benefit and the trust has not vested.
2. Resolve by 30 June. A resolution only counts for working out who is assessed if it is made by the end of the income year. A deed can set an earlier date, and then the earlier date applies.
3. Use clear wording. Final accounts are not needed by 30 June. The ATO accepts a clear method, such as a set percentage of the income, unless the deed requires a dollar amount. Vague wording can fail: the ATO gives the example of a resolution covering only trading income, which leaves interest income undealt with.
4. Keep a record. Whether a resolution must be written depends on the deed, but the ATO says a written record gives better evidence. Records created after 30 June are accepted as evidence of a resolution validly made by that date.
5. Report after year end. The trustee gives each beneficiary details of their share and lodges the trust tax return. Beneficiaries then include their share in their own returns.

Two kinds of income have their own dates. A beneficiary's specific entitlement to franked dividends must be recorded in writing by 30 June, and to capital gains by 31 August.

A worked distribution year: the same profit, three tax outcomes

This example is an illustration only, using the ATO's 2026-27 resident tax rates. Assume a discretionary trust has trust income and net income of $120,000, and two resident adult beneficiaries, Alex and Sam, with no other income. The figures leave out the Medicare levy and any offsets.

The first two rows use the rate table directly. For $60,000, that is $4,020 plus 30 cents for each dollar over $45,000. The third row reflects the ATO's statement that a trustee is generally taxed at the highest marginal rate that applies to individuals.

In the first two rows, tax follows entitlement rather than cash. If Sam's $60,000 stays in the trust, Sam is still assessed on it.

The 30% minimum tax from 1 July 2028 is proposed and not yet law

The 30% minimum tax on discretionary trusts was not law as at 4 November 2026. Two bills carry it: the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 and the Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026. Parliament's bill pages show both were introduced on 14 October 2026 and had their third reading agreed in the House of Representatives on 29 October 2026. A Senate committee is due to report on 13 November 2026, and those pages list no Senate passage. The details below could change.

As drafted, trustees would pay a minimum rate of 30% on the trust's minimum tax income from 1 July 2028. According to the Parliamentary Library's Bills Digest, that is the portion of the trust's net income left after excluded income. Eligible non-corporate beneficiaries would receive a non-refundable offset equal to 30% of their share of the trust's minimum tax income. The Bills Digest says the offset can reduce income tax payable to zero but cannot generate a refund. Corporate beneficiaries would receive no offset.

Exclusions named by the Treasurer include fixed trusts, charitable trusts, special disability trusts, superannuation funds and deceased estates, along with primary production income. The Bills Digest also describes an exclusion for income of a testamentary trust that meets certain conditions.

The same example with the minimum tax applied

This table reruns the $120,000 example as the bills are drafted. It still uses 2026-27 rates to keep the comparison simple, and the actual rates in 2028-29 may differ.

Because the offset cannot produce a refund, the unused part in this example ($9,480 per beneficiary in the first row, $9,480 for Alex in the second) does not come back as cash where the beneficiary has no other tax to reduce. The Government's budget explainer points the same way: a family splitting $200,000 of investment income four ways in 2028-29 pays $24,008 without the minimum tax, while the trust would pay 30% on the whole $200,000 with the minimum tax in place.

The options set out in the bills and Treasury material

The bills and Treasury material describe several responses to the minimum tax. Which of them, if any, fits depends on the trust:

• Roll-over relief. A trust restructuring into a company or fixed trust could access optional roll-over relief from 1 July 2027 to 30 June 2030.
• A one-off election in place of restructuring. A trust existing on 1 July 2028 could make a one-off election in its first income year under the minimum tax, generally 2028-29, and distribute in line with an upfront nomination of beneficiaries. The Bills Digest says a trustee can use the roll-over or the election, but not both.
• Wages for working family members. Treasury says normal wages or salaries will not attract the minimum tax where family members genuinely work in the business.

Queensland readers should note the Bills Digest's report that Queensland left open the possibility of transfer duty under this one-off election, while the federal Treasurer has said the election is not expected to trigger stamp duty.

What a family trust costs to run: the components, with figures only where confirmed

A family trust's yearly cost is a list of compliance tasks rather than one published figure. business.gov.au says trusts can be expensive to set up and operate and require formal yearly administrative tasks. This table lists the components and quotes a dollar amount only where it was confirmed from a government source.

For how accounting fees are usually built up, see what accountants charge small businesses.

The family trust election gives access to concessions, with a 47% tax outside the family group

A family trust election gives a trust access to certain tax concessions in exchange for tying it to the family group of one person, called the specified individual. The ATO lists reasons trustees make one, including easier use of trust losses, a company loss tracing concession, access to franking credits under the holding period rules, and exclusion from trustee beneficiary reporting.

The trade-off is family trust distribution tax. It applies when the trust confers a present entitlement to, or distributes, income or capital outside the specified individual's family group. The ATO states the rate as the top marginal rate plus the Medicare levy, currently 47%. The tax is generally due 21 days after the distribution, and there is no time limit on the ATO issuing a notice of liability.

The election is hard to undo. A trustee can make only one, and it can only be varied or revoked in limited circumstances. Only one individual can be specified, and they remain the specified individual after death. Even a family member's own trust can sit outside the group: the ATO says a non-fixed trust specifying a different individual is not part of the family group.

Downsides of a family trust to check before relying on one

Drawbacks of a family trust include trustee liability, tax on money not received, and limits that are hard to reverse. Beyond the running costs above, the points the primary sources raise are:

• Trustee liability. Under trust law, trustees are personally liable for the debts of trusts they administer, with a right to be indemnified from trust property for properly incurred liabilities. A company trustee can provide some asset protection, according to business.gov.au.
• Trapped losses. A trust's loss can't be distributed to beneficiaries. The trust may be able to carry it forward to reduce net income in a later year, subject to the trust loss rules.
• Tax without cash. Beneficiaries are assessed on entitlements whether or not the money is paid.
• Children's distributions. Higher rates apply to most distributions to minors. For 2025-26, a resident under 18 who is not what the ATO calls an excepted person pays 45% on the total income that is not excepted income, once it is over $1,307.
• Finance and retained profits. The Government's budget explainer says trusts do not provide a simple way to retain earnings and have more difficulties accessing debt financing or attracting equity finance.
• Hard to change. business.gov.au says trusts can be difficult to dissolve or change once established.
• A built-in vesting point. A deed usually sets a date or event on which interests must vest, and the ATO says it is too late to change the vesting date or clause after the trust has vested.
• Tax file number withholding. The trustee of a closely held trust must withhold tax from payments to beneficiaries who have not provided their tax file number.

What attracts ATO attention on trusts: distributions where someone else benefits

The ATO publishes a list of trust activities that attract its attention. The list includes circular distributions between trusts, distributions to tax-preferred beneficiaries where the entitlement is not paid to them or is applied to someone else, and cases where the distributable income of tax-preferred beneficiaries, including private companies, is significantly less than net income. It also covers family trusts distributing outside the family group.

Section 100A is an anti-avoidance rule in this area. According to the ATO, it can apply where a beneficiary is made presently entitled under an arrangement, called a reimbursement agreement, in which someone else receives a benefit and at least one party has a purpose of reducing tax. The ATO says there is no reimbursement agreement where an agreement is entered into in the course of ordinary family or commercial dealing, or where the beneficiary is under 18. The ATO also says it uses the trust income figures reported on the return to check each beneficiary's share and consider whether anti-avoidance provisions may apply.

When the answer depends on your circumstances

The ATO's own advice on business structures is to talk to a registered tax agent or a trusted business or legal adviser if unsure. This guide does not recommend setting up, keeping or restructuring a trust.

To compare structures from the beginning, read sole trader or company.

Lomandra Accounting is a certified practising accountant (CPA) practice registered with the Tax Practitioners Board, and it prepares company, trust and partnership tax returns. It works online by phone, video and email wherever you are based in Australia. Its list of what to prepare before engaging it includes last year's tax returns and financials, along with trust deeds and minutes. See its business accountant page for the Sunshine Coast or contact Lomandra Accounting. Readers in Mooloolaba can also see the Mooloolaba accountant page.