How to Set Up a Trust in Australia

Have you noticed how effortlessly your friend’s business is managed as compared to all other small businesses? Well, it might just be because they’ve set up a trust legal structure. Now, before you start thinking this is some fancy financial ‘non-sense’, let’s break it down to the meaning of all these. We’re going to explore the ins and outs of the trust business structure in Australia, and by the end of this article, you’ll be as clued up as a Fitzroy hipster on the coffee trends.

What is a Trust?

AlriAlright, let’s start with the basics. In the business world, a trust is like a protective bubble for your assets and income (trustee duties and legal compliance still apply). It’s a legal arrangement in which a person (called a trustee) holds and manages assets or property on behalf of another person or group (called beneficiaries).

Picture this: You have an awesome AFL memorabilia collection. Instead of keeping it in your garage where your kids might use your signed Dustin Martin guernsey as a painting smock, you decide to entrust it to your responsible friend. They look after it, but it’s still for the benefit of you and your family. That’s kind of how a trust works in business.

The key components and roles involved in the structure of a trust are:

The Trustee: This is the individual or corporation in charge of managing the trust’s assets and affairs.
The Beneficiaries: These are the people or organisations who benefit from the trust.
The Trust Property: This includes all assets held by the trust.
The Trust Deed: This is the legal document that governs how the trust functions.

For a more detailed explanation of business structures, including trusts, check out Future Advisory’s guide on choosing the best business structure. You can also find more information on the Australian Government’s business website

Terms You Need to Know Before Starting A Trust

Before we dive deeper into the world of trusts, let’s familiarise ourselves with some key terms. Consider this as your trust structure basic guide – it will be useful when you are having a conversation with your accountant over a flat white.

The Settlor: This is the person who establishes the trust and transfers the initial assets into it. It’s similar to how someone starts a game of backyard cricket – they set everything up, step back, and let the game begin.
The Trustee: The trustee is the legal owner of the trust’s assets and is in charge of managing the trust in accordance with the trust deed and for the benefit of its beneficiaries. It’s a bit like being the captain of a footy team – you’re in charge, but you’re working for the benefit of the whole team.
The Beneficiary or Beneficiaries: These are the individuals or entities who benefit from the trust. They’re like the spectators at a BBQ – they don’t run the show, but they get to enjoy the results.
The Trust Deed: This is the rulebook for the trust. It sets out how the trust should operate, who the beneficiaries are, and what powers the trustee has. It’s as important as the rules in AFL – without it, chaos would ensue.
The Appointor: This individual has the authority to dismiss and appoint trustees. They’re like the coach of a footy team – they don’t play the game, but they have the power to change who’s on the field.

These definitions are based on information from the Law Society of NSW (https://www.lawsociety.com.au/for-the-public/know-your-rights/trust/how-trust-works), a reliable source for legal information in Australia.

08 Types of Trusts Used in Australia

Now that we’ve got the basics sorted, let’s look at the different types of trusts you might come across in Australia. It’s like walking into a pub and seeing all the different beers on tap – each has its own characteristics and suits different tastes.

Discretionary Trust

This is one of the most common types of trusts used by small businesses in Australia. The trustee has the discretion to decide how the trust’s income and capital are distributed among beneficiaries. It’s like being the BBQ master – you get to decide who gets what portion of the snags.

Trust business structure example: The Smith Family Trust is set up as a discretionary trust. At the end of the financial year, the trustee can decide to distribute more income to family members with lower tax rates, potentially reducing the overall tax paid by the family (distributions must comply with deed powers, and beneficiaries must be present to receive them. The ATO may scrutinise for tax avoidance if distributions are aggressive).

Fixed Trusts

In a fixed trust, the beneficiaries’ entitlements are fixed and predetermined. It’s like buying tickets to the footy – you know exactly which seat you’re getting.

Example: A property trust where each beneficiary is entitled to a specific percentage of the rental income and capital gains.

Unit Trusts

Unit trusts are similar to fixed trusts, but the beneficiaries’ interests are divided into units, much like shares in a company. It’s a bit like owning a slice of a really good pizza – the more slices (units) you have, the bigger your share.

Example: An investment trust where investors buy units, and returns are distributed based on the number of units held.

Hybrid Trusts

These trusts combine elements of different trust types. They’re like a fusion restaurant – a bit of this, a bit of that, creating something unique.

Example: A trust that has both fixed entitlements for some beneficiaries and discretionary distributions for others.

Testamentary Trusts

These are created in a will and come into effect after the will-maker’s death. It’s like leaving a legacy playbook for your family after you’ve kicked the bucket.

Example: A trust set up in a will to manage assets for minor children until they reach a certain age.

Charitable Trusts

As the name suggests, these trusts are set up for charitable purposes. It’s like running a sausage sizzle, but on a much grander scale.

Example: The Salvation Army operates as a charitable trust, using its funds for various community services.

Superannuation Trusts

These trusts are specifically designed to hold and manage superannuation funds. They’re like a piggy bank for your retirement – but with a lot more rules and regulations.

Example: Your employer’s default super fund is likely set up as a superannuation trust.

Bare Trusts

In a bare trust, the trustee has no active duties beyond transferring the trust property to the beneficiary when instructed. It’s like being a delivery driver – your job is simply to get the package from A to B.

Example: A trust set up to hold a property for a child until they reach 18.

Why Should Small Businesses Use Trust?

And now you might be thinking, “This all sounds very confusing. Why would I even consider setting up a trust for my small business?” Well, let us put it this way, there are some pretty good reasons why a number of small business owners in Australia have turned to using trusts

Reduced Liability: If you set up your trust with a trustee company structure (that’s a company acting as trustee) , you can help mitigate your personal liability. It’s similar to a biker wearing a helmet: if something goes wrong, you’ve got an extra layer of protection.
Asset Protection: If you place your assets in a trust, creditors or even legal claims against your company will be unable to harm them. It’s like putting your valuables in a safe – they’re harder for others to get their hands on.
Flexibility of Asset and Income Distribution: Trusts, especially discretionary trusts, offer a wide range of income and asset distribution options. This can be particularly useful for tax planning.

According to a 2021 report by the Australian Taxation Office (ATO), more small business owners are opting to operate through a trust structure, highlighting its growing popularity among savvy business owners.

How Trust Business Structure Is Superior to the Normal Company Structure

Now, you might be wondering, “Why not just set up a normal company?” Well, in many cases, a trust structure can offer some significant advantages over a standard company structure. Let’s break it down:

Tax Planning: Trusts can offer more flexibility in distributing income to beneficiaries, potentially resulting in lower overall tax. Companies, on the other hand, are taxed at a flat rate.
Asset Protection: While companies offer some asset protection, trusts can provide an additional layer of security, especially for personal assets.
Estate Planning: Trusts can be an effective tool for passing on wealth to future generations, something that’s not as straightforward with a company structure.
Privacy: Trust structures generally offer more privacy than companies, whose details are publicly available through ASIC.

Here’s a quick comparison table to understand the differences:

Trust Structure	Company Structure
Ownership	Beneficiaries have beneficial interests but don’t own assets	Shareholders own the company
Liability	Trustees can be personally liable (unless protected by a trust deed)	Shareholders have limited liability
Taxation	Income distributed to beneficiaries is taxed at their marginal rates	The company pays tax on profits; dividends are taxed in shareholders’ hands
Flexibility	More flexible in terms of income distribution and asset management	Less flexible, governed by corporate laws
Privacy	Generally more private than a company	Publicly available information for companies
Legal Structure	Governed by a trust deed	Governed by corporate laws
Suitable for	Estate planning, asset protection, tax minimisation	Business operations, capital raising, and limited liability

Setting up a Trust Business Structure in Australia

Alright, so you’re sold on the idea of a trust for your business. But how do you actually go about setting up a trust in Australia? Here’s how to set up a trust in Australia — a quick guide to your trust setup from start to finish. Don’t worry, we’ve got you covered. Here’s a rundown of what you need to know:

Legal Requirements and Documentation for Trust Formation

Setting up a trust isn’t as simple as deciding to have a barbie on a Sunday afternoon. There are some legal hoops you’ll need to jump through:

Trust Deed: This is the big one. You’ll need a properly drafted trust deed that sets out the rules of your trust. It’s like the constitution for your trust.
Settlor: You’ll need someone to act as the settlor. They’ll sign the trust deed and provide a small sum (often $10) to establish the trust.
Trustee: You’ll need to appoint a trustee. This can be an individual or a company.
ABN and TFN: You’ll need to apply for an Australian Business Number (ABN) and Tax File Number (TFN) for your trust.
Bank Account: You’ll need to open a trust account in your trust’s name. Here’s how to open a trust account in Australia, step by step.

The Role of Trustees and Beneficiaries

In a trust structure, the roles of trustees and beneficiaries are crucial:

Trustees:

Manage the trust’s assets
Make decisions about distributions
Ensure the trust complies with all relevant laws and regulations

Beneficiaries:

Receive distributions from the trust
May have rights to information about the trust’s activities

Costs Involved in Establishing and Maintaining a Trust

Wondering about the cost of setting up a trust in Australia? Curious how much does it cost to set up a trust with legal and ongoing admin? Setting up and running a trust isn’t free, mate. Here are some costs you might encounter:

Legal fees for drafting the trust deed (typically $1,000 – $5,000, but can vary significantly depending on complexity and the State/Territory)
Accounting fees for annual tax returns and financial statements (varies, but budget for at least $2,000 per year)
Potential stamp duty on the transfer of assets into the trust (varies by state)
Ongoing trust maintenance fees and compliance costs (think annual tax returns, accounting, and possible audits)

According to a 2022 survey by the Institute of Public Accountants, the average cost of setting up a trust in Australia is around $3,500, with annual maintenance costs averaging $2,500.

How to Transition from Another Business Structure to a Trust

Maybe you’ve already got your business up and running, but you’re thinking a trust structure might be a better fit. No worries – it’s possible to transition, but there are a few things to consider.

When to Change Business Structure to a Trust

You might consider changing to a trust structure when:

Your business has grown significantly, and you need better asset protection
You’re looking for more flexibility in distributing income
You’re planning for succession or estate planning

Steps to Transitioning Your Business to a Trust Structure

Seek Professional Advice: This is crucial. Chat with your accountant and a lawyer who specialises in business structures.
Valuation: Get a proper valuation of your business assets.
Create the Trust: Set up the new trust structure.
Transfer Assets: Transfer the business assets to the new trust. Be aware this might trigger capital gains tax, stamp duty, goodwill issues, and/or contract novations. .
Update Registrations: Update your ABN, GST registration, and any other business registrations.
Notify Stakeholders: Let your customers, suppliers, and employees know about the change.
Update Contracts: Review and update any contracts or agreements in the new trust’s name.

Remember, transitioning to a trust isn’t a decision to be taken lightly. As stated in a 2023 report published by CPA Australia, around 15% of small businesses that change their structure opt for a trust, due to its flexibility in taxation and protection of assets

In conclusion, trust structures can offer significant benefits for many Australian small businesses, but they’re not a one-size-fits-all solution. They come with their own complexities and costs, so it’s crucial to get professional advice before making the leap.

So, there you have it – everything you need to know about trust business structures in Australia, served up with a side of true blue Aussie flavour. Whether you’re a tradie in Toorak or a Sydney startup, understanding your options when it comes to business structures is crucial. And remember, just like choosing between a meat pie and a sausage roll, the right choice depends on your specific situation.

Got questions about whether a trust structure might be right for your business? Why not give us a call?

Frequently Asked Questions About Trust Business Structures

How to set up a trust in Australia?

Setting up a trust in Australia involves several key steps. First, you’ll need a properly drafted trust deed; think of it as your trust’s rulebook. Next, appoint a settlor who’ll kick things off with a small initial contribution (usually around $10).

Choose your trustee (either an individual or a trustee company structure for better protection), then apply for an ABN and TFN through the ATO. Finally, open a dedicated trust account with your bank. The whole process typically takes a few weeks, and it’s worth getting professional advice to make sure everything’s done properly. Just like you wouldn’t DIY your electrical work, you shouldn’t DIY your trust setup.

What is a trustee company structure and why would I need one?

A trustee company structure means having a company act as the trustee of your trust, rather than an individual. It’s like wearing a helmet when you’re riding; it gives you that extra layer of protection. If something goes pear-shaped with the trust, your personal assets are better shielded from liability.

This structure is particularly popular among Melbourne business owners who want to protect their family home in Fitzroy or their investment properties in Brunswick while still running their business through a trust. The company acts as a buffer, handling the trust’s obligations while limiting your personal exposure.

How much does it cost to set up a trust in Australia?

Setting up a trust in Australia isn’t cheap, but it’s an investment in your business’s future. You’re looking at legal fees for drafting the trust deed (typically between $1,000 and $5,000), plus potential stamp duty depending on which assets you’re transferring and which state you’re in.

According to recent industry data, the average cost of setting up a trust sits around $3,500. Don’t forget the ongoing costs either, annual accounting fees for tax returns and financial statements usually start at $2,000 per year. Think of it like maintaining your car: there’s the upfront purchase price, then the ongoing servicing costs to keep everything running smoothly.

What’s a good trust business structure example for small businesses?

Here’s a ripper example that shows how trusts work in practice: imagine the Melbourne Coffee Co. is set up as a discretionary trust with a trustee company structure. The business owns café equipment, stock, and the trading income, all held by Coffee Co Pty Ltd as trustee for the Melbourne Coffee Family Trust.

At year’s end, the trustee can distribute profits to family members, maybe more to the parents who are semi-retired (and in lower tax brackets) and less to the adult kids still working full-time. This flexibility in distributing income means the family pays less tax overall compared to a standard company structure. Plus, if the café faces legal issues, the family home in Camberwell stays protected because it’s not owned by the trust.

How long does trust establishment take in Australia?

Trust establishment in Australia typically takes between two to four weeks from start to finish, depending on how complex your situation is. The trust deed drafting is usually the longest part; your lawyer needs to get all the details right, including who your beneficiaries are, what powers the trustee has, and how distributions will work.

Once the deed is signed and settled, getting your ABN and TFN sorted is relatively quick (usually a few days), and opening a trust account can be done in a week or so. If you’re transferring existing business assets into the trust, factor in extra time for valuations and any stamp duty assessments. It’s not an overnight job, but it’s worth taking the time to do it properly rather than rushing through like you’re trying to beat the lunch rush at a Bourke Street café.

Can I open a trust account with any bank?

Yes, most major Australian banks allow you to open a trust account, but you’ll need specific documentation. When you rock up to the bank (or apply online), you’ll need your trust deed, proof of the trustee’s identity (either personal ID if you’re the trustee, or company documents if you’re using a trustee company structure), your trust’s ABN and TFN, and sometimes a certified copy of the trust deed.

The account must be opened in the trust’s name, not your personal name, something like “Smith Family Pty Ltd ATF Smith Family Trust.” Different banks have different requirements and fees, so it’s worth shopping around. Some banks even have dedicated business banking teams who understand trust structures better than your average teller, ask for them if you want to avoid explaining what a trust is three times over.

What are the ongoing costs of maintaining a trust business structure?

Beyond the initial setup, running a trust business structure comes with annual costs you need to budget for. Accounting fees for preparing trust tax returns and financial statements typically start at $2,000 per year but can go higher depending on how complex your affairs are. If you’re using a trustee company structure, you’ll also need to maintain the company with ASIC annual fees (currently $311 for a proprietary company). Some trusts require annual audits, which add extra costs.

You might also need periodic legal reviews of your trust deed to ensure it’s still fit for purpose, especially if tax laws change. Think of these costs like the annual service for your ute, necessary maintenance to keep everything running legally and efficiently. According to accountants, the average annual maintenance cost for a trust hovers around $2,500.

Is setting up a trust worth it for my small business?

Whether setting up a trust is worth it depends on your specific situation, mate. Trusts shine when you’re looking for asset protection (keeping your personal assets safe from business liabilities), tax flexibility (distributing income to family members in lower tax brackets), or estate planning (passing wealth to the next generation).

If you’re a Melbourne tradie with valuable equipment and a growing business, or a consultant earning a good income and wanting to split it with your partner, a trust business structure could save you thousands in tax each year. However, if you’re a solo operator with minimal assets and straightforward tax affairs, the setup and ongoing costs might outweigh the benefits. Have a chat with your accountant over a flat white, they’ll help you crunch the numbers based on your actual situation.

Can I change from a sole trader to a trust business structure?

Absolutely, you can transition from sole trader to a trust business structure, though it’s not as simple as flicking a switch. The process involves creating trust, transferring your business assets into it, and updating all your registrations and contracts.

Here’s the catch: transferring assets might trigger capital gains tax or stamp duty, so you need to weigh up whether the long-term benefits outweigh these upfront costs. Around 15% of small businesses that change their structure opt for a trust, mainly for the tax flexibility and asset protection it offers.

You’ll definitely want professional advice before making the jump. Your accountant can model out whether the transition makes financial sense for your situation. It’s a bit like renovating your house: sometimes it’s worth the investment, sometimes it’s better to stick with what you’ve got.

What’s the difference between a discretionary trust and a fixed trust for business?

The main difference comes down to flexibility versus certainty. In a discretionary trust (the most popular choice for Australian small businesses), the trustee gets to decide each year who receives what share of the income and capital, like being the BBQ master who decides who gets the best snags. This flexibility is brilliant for tax planning because you can distribute more income to family members in lower tax brackets.

A fixed trust, on the other hand, has predetermined entitlements—each beneficiary knows exactly what percentage they’ll receive, like having assigned seats at the footy. Fixed trusts offer more certainty and are often used for investment properties or when you need clear ownership percentages. For most small businesses in Melbourne, discretionary trusts offer the flexibility needed to manage changing family and business circumstances over time.

Trust Legal Structures & Setup Costs in Australia Explained