Trust Structures vs Companies: Tax Comparison in Australia

Picking the wrong business structure costs Australian business owners real money. Not just at tax time, but year after year through missed opportunities, avoidable compliance costs, and structural inflexibility when circumstances change. The two structures most commonly weighed up are discretionary trusts and proprietary limited companies, and while they’re often compared as if one is simply “better” than the other, the honest answer is that it depends entirely on what you’re trying to achieve. Income distribution, asset protection, retained earnings, succession, and capital gains treatment all point in different directions depending on which entity you choose.

Understanding how each structure actually works under Australian tax law gives you a much clearer basis for that decision and helps you spot the traps that catch business owners who set up one structure and assume it’ll handle everything.

 

How Trust Structures Work for Australian Business Owners

A discretionary trust, often called a family trust, is a legal arrangement where a trustee holds and manages assets on behalf of a defined group of beneficiaries. The trustee has the power to decide, each financial year, which beneficiaries receive trust income and in what proportions. That discretion is the defining feature, and it’s what makes this structure so useful for tax planning.

Trusts are not taxpaying entities in their own right. Income flows through to beneficiaries, who pay tax at their individual rates. A trustee who fails to make a valid distribution resolution by 30 June will find the entire undistributed income taxed at 47%, the top marginal rate, so annual distribution planning is not optional. Get specialist advice from a business accountant familiar with Australian trust law before any financial year ends, particularly if your beneficiary mix or income levels have changed.

 

Income Splitting and Tax Minimisation Through a Discretionary Trust

The primary tax advantage of a discretionary trust is the ability to split income across multiple beneficiaries who may each have lower taxable income. If a trust earns $200,000 and distributes $40,000 each to five family members in lower tax brackets, the combined tax bill can be substantially less than if that same income flowed to a single high-income individual.

In practice, beneficiaries often include adult children, a spouse, and a corporate beneficiary, sometimes called a bucket company. Distributing a portion of trust income to a company capped at the 25% or 30% corporate rate can reduce overall tax where individual beneficiaries would otherwise face marginal rates of 39% or 47%. For a detailed breakdown of how bucket companies work alongside trust structures, the Bentleys guide to bucket companies and trust profit maximisation covers the mechanics and the limits.

One important caveat: the ATO has significantly tightened its position on trust distributions, particularly under Section 100A. Distributions to low-income adult beneficiaries who don’t actually enjoy the economic benefit of the income, for example, where they gift it back to a parent or the proceeds are used by others in the family, can be attacked as reimbursement agreements and assessed at the top marginal rate. The ATO’s updated guidance on trust distributions is mandatory reading for anyone using a family trust.

 

Family Trusts, Asset Protection, and Succession

Beyond income distribution, the family trust structure offers meaningful asset protection. Because the trust, rather than any individual, holds the assets, they are generally insulated from the personal liabilities of beneficiaries. A business owner who faces creditor claims personally typically cannot have trust assets seized to satisfy those claims, provided the trust was established and maintained properly and not as a fraudulent preference.

Succession is another genuine advantage. Assets in a well-structured family trust do not form part of any individual’s estate. They can continue to be managed by a successor trustee, or a corporate trustee, after the original controller’s death, without triggering a CGT event or requiring probate. For families holding significant wealth across multiple generations, this continuity is worth considerably more than any short-term tax saving. The Bentleys guide to family trusts and intergenerational wealth transfer explains how this works in practice for Australian families.

 

The Trust Deed: Get It Right from the Start

The trust deed is the governing document that determines who can be a beneficiary, what powers the trustee holds, how income and capital can be distributed, and what happens if the trustee changes. A poorly drafted deed can lock you into a structure that no longer suits your circumstances, or worse, deny you the ability to make distributions to the parties you intended.

In Australia, the deed must be carefully drafted to reflect your specific goals and comply with the relevant state stamp duty rules. Changing a deed after the fact can be costly and sometimes impossible without triggering unintended tax consequences. This is one area where using a generic template rather than engaging a qualified legal and tax professional creates problems that surface years later when the stakes are highest.

 

How Companies Are Taxed in Australia

A proprietary limited company (Pty Ltd) is a separate legal entity that pays tax in its own right. The corporate tax rate is currently 30% for base rate entities with a passive income ratio above 80%, and 25% for base rate entities with an aggregated turnover below $50 million that primarily conduct an active business. The flat rate is a genuine advantage for business owners in high marginal tax brackets, because retaining profits in the company at 25% rather than distributing them and paying 47% can substantially accelerate capital accumulation.

Companies also generate franking credits when they pay tax on their income. When franked dividends are paid to shareholders, those shareholders receive a credit for the tax already paid at the corporate level, reducing the risk of double taxation on distributed profits. For shareholders with marginal rates below the corporate rate, a franked dividend can even generate a tax refund. The Australian Taxation Office provides detailed guidance on the dividend imputation system and how franking credits are calculated and applied.

 

Capital Gains Tax: Where Trusts Have the Edge

One of the most significant differences between trusts and companies is how capital gains are treated, and the original article gets this backwards. Companies do not receive the 50% CGT discount. When a company sells an asset held for more than 12 months, it pays tax on the full capital gain at the corporate rate. A discretionary trust, by contrast, can flow the capital gain through to individual beneficiaries who apply the 50% CGT discount, effectively halving the taxable gain before it reaches their personal return.

For businesses holding appreciating assets such as property, investment portfolios, or goodwill, this difference can be enormous. A trust that realises a $1 million capital gain can distribute $500,000 in assessable gain after the discount. A company in the same position pays tax on the full $1 million. For Australian SMEs that have built significant asset value and are planning an eventual exit, understanding the small business CGT concessions is equally important, as those concessions can reduce or eliminate the taxable gain altogether, subject to meeting the eligibility criteria around aggregated turnover and net asset value.

 

Division 7A: A Critical Risk for Company Structures

Division 7A of the Income Tax Assessment Act 1936 catches a lot of business owners off guard, and it’s one of the most important practical differences between trusts and companies. When a private company makes a loan, payment, or forgives a debt to a shareholder or an associate, Division 7A can deem that amount to be a dividend, taxable to the recipient at their marginal rate without the benefit of franking credits.

The most common scenario is a shareholder drawing cash from the company account for personal use and treating it as a loan. To avoid a deemed dividend, the loan must be formalised under a compliant Division 7A loan agreement, with minimum annual repayments calculated in accordance with the ATO’s benchmark interest rate. Missing a repayment in any given year triggers a deemed dividend on the shortfall. This compliance requirement doesn’t exist in a trust structure, which distributes income directly to beneficiaries each year rather than retaining it in the entity. Anyone using a company structure should have their Division 7A position reviewed annually, particularly where director loans or unpaid present entitlements to a corporate beneficiary are involved.

 

Compliance Costs and Administrative Obligations

Companies face more demanding compliance obligations than trusts. ASIC requires annual review fees, registered office and officeholder notifications, and the maintenance of company registers. Directors must meet their duties under the Corporations Act 2001, including solvency obligations, and the Australian Securities and Investments Commission actively enforces those requirements. Auditing obligations may apply depending on the size and nature of the company.

Trusts carry lower annual compliance costs overall, but they are not simple to administer. Distribution resolutions must be made and documented before 30 June each year. The trust deed must be reviewed whenever circumstances change. And as Section 100A risk increases, the level of documentation required to support distribution decisions has grown considerably. Neither structure is set-and-forget. Both require ongoing professional attention.

 

Liability Protection: What Each Structure Delivers

A company provides the corporate veil, limiting shareholders’ liability to the value of their shares in most circumstances. A director’s liability is separate and more extensive, covering specific obligations around insolvent trading, unpaid superannuation, and tax obligations. Personal guarantees required by lenders, landlords, and suppliers further erode the practical protection of the corporate structure for many SMEs.

Trusts protect assets by separating ownership from control. Because the trustee holds assets on behalf of beneficiaries rather than owning them outright, a creditor pursuing a beneficiary personally generally cannot reach trust assets. However, trustees, particularly corporate trustees, can be personally liable for the obligations of the trust. Using a corporate trustee specifically established for that purpose, with no other activities, is the standard approach for limiting that exposure.

 

Succession Planning: Where Trusts Offer More Flexibility

For business owners thinking about what happens next, both structures have roles to play, but trusts typically offer more flexibility. A family trust can be restructured through trustee changes, memoranda of wishes, or deed amendments without triggering a CGT event in many circumstances. Assets remain within the trust structure across generations, managed according to the trustee’s discretion rather than being subject to estate administration.

Companies facilitate succession through the transfer of shares, which can be gifted or sold to family members, management, or external buyers. The ongoing legal entity provides continuity of contracts, licences, and employment arrangements. For a business being sold as a going concern, the company structure is often more straightforward for buyers, who can acquire shares rather than assets. A guide to choosing the right business structure in Australia covering each option in depth is a useful starting point for business owners reviewing their position ahead of a sale or family transition.

 

Making the Right Choice for Your Business

No single structure suits every business. Trusts are generally stronger for income distribution, capital gains management, asset protection, and succession flexibility. Companies are stronger for profit retention, raising capital, providing a fixed tax rate, and simplifying external transactions. Many established Australian business groups use both, with a trading company held within or alongside a trust, or a corporate trustee holding assets while the trust distributes income to beneficiaries.

The choice has lasting consequences, because restructuring later often triggers stamp duty, CGT, or both. Making the decision with proper professional advice from the outset avoids the cost and disruption of fixing a poorly planned structure years down the track.

 

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

 

FAQs

What is the main tax difference between a trust and a company in Australia?

A company pays tax at a fixed corporate rate, while a trust generally distributes income to beneficiaries who are taxed at their own marginal tax rates.

Can an Australian company access the 50% Capital Gains Tax discount?

No, companies cannot access the general 50% capital gains tax discount available to individuals and trusts for eligible assets held longer than twelve months.

How does income splitting work in a discretionary trust?

A discretionary trust allows the trustee to distribute income between beneficiaries in different tax brackets to potentially reduce overall family tax liability.

What is a corporate trustee and why is it used in Australia?

A corporate trustee is a company appointed to manage a trust and is commonly used to improve asset protection and separate personal liability from trust operations.

What is the company tax rate for an Australian small business in 2026?

Eligible base rate entities with turnover below the threshold generally pay a company tax rate of 25%.

Does an Australian trust pay tax on its own income?

A trust usually does not pay tax if all income is distributed to beneficiaries, but undistributed income may be taxed at the highest marginal rate.

What are franking credits and how do they benefit shareholders?

Franking credits represent tax already paid by a company and help reduce or offset the shareholder’s personal tax liability on dividends received.

What is Division 7A and why is it a risk for Australian companies?

Division 7A prevents private companies from providing tax-free benefits to shareholders through informal loans or payments that should be treated as dividends.

Can a trust carry forward business losses to future years?

Yes, trusts can carry forward losses, but strict trust loss rules and continuity tests must be satisfied before those losses can be used.

What is an Unpaid Present Entitlement (UPE) in an Australian context?

A UPE occurs when trust income is allocated to a beneficiary but not physically paid, which can create tax risks if not managed correctly.

Which structure offers better asset protection under Australian law?

Both structures offer protection, though discretionary trusts are often preferred for separating beneficial ownership from personal assets.

Is it more expensive to maintain a company or a trust in Australia?

Companies are generally more expensive due to ASIC fees and corporate compliance obligations.

Why must trust distribution minutes be completed by 30 June?

Trustees must formally document income distributions before the end of the financial year to avoid adverse tax consequences.

What is a “bucket company” and how is it used with a trust?

A bucket company receives trust distributions to cap tax at the corporate rate instead of higher personal marginal tax rates.

How long can a trust legally exist in Australia?

In most Australian states, trusts are subject to perpetuity rules limiting their lifespan, though some jurisdictions allow extended periods.

What is Section 100A and why is the ATO focusing on it?

Section 100A targets reimbursement arrangements where trust income is distributed to one person but ultimately benefits another.

Can I change my business structure from a trust to a company?

Yes, restructuring is possible, though capital gains tax, stamp duty, and rollover relief considerations usually require professional advice.

Do beneficiaries pay the Medicare levy on trust distributions?

Yes, trust distributions received by individuals are generally included in taxable income and subject to the Medicare levy.

Are companies eligible for small business CGT concessions?

Yes, companies and trusts can both qualify for small business capital gains tax concessions if they meet eligibility requirements.

What is a Family Trust Election (FTE)?

A Family Trust Election is an ATO election that defines a trust’s family group and can help preserve access to tax losses and franking credits.

Is a unit trust different from a discretionary trust for tax purposes?

Yes, unit trusts provide fixed entitlements based on ownership units, while discretionary trusts allow flexible income distributions.

How are trust distributions to minor children taxed in Australia?

Most trust income distributed to minors above low thresholds is taxed at penalty rates to discourage income splitting arrangements.

What are the primary reporting obligations for an Australian company?

Companies must lodge annual tax returns, maintain financial records, comply with ASIC obligations, and complete director solvency resolutions.

How do Personal Services Income (PSI) rules affect these structures?

PSI rules can override trust or company structures and attribute income directly to the individual who earned it through personal effort or skills.

Should a high-growth startup use a trust or a company?

Most high-growth startups use companies because they are better suited for investment raising, employee share schemes, and venture capital funding.