Trusts are frequently discussed in business and family conversations, yet they are often not clearly understood. For some, they seem complex and legalistic. For others, they are assumed to be automatic tax-saving tools. In reality, a trust is neither mysterious nor magical. It is simply a structure – and like any structure, it works well when it suits its purpose.
At its most basic level, a trust is a legal arrangement where a trustee holds assets for the benefit of beneficiaries. The trustee controls the assets and makes decisions in accordance with the trust deed, while the beneficiaries receive the benefit of income or capital distributions.
While the legal language can feel formal, the intention behind most trusts is practical. They are commonly used for three key reasons: asset protection, income distribution flexibility, and succession planning.
Asset Protection and Risk Management
For business owners, asset protection is often the first reason a trust is considered.
Industries such as trades, primary production, equine enterprises, vineyard operations and even certain professional services can carry exposure to operational risk. Holding business assets, investments or property within a trust structure can create separation between trading risk and long-term wealth.
For example, a family may operate a trading company that runs day-to-day business activities, while property or investment assets are held in a separate discretionary trust. This separation can reduce exposure if the trading entity faces financial difficulty.
However, when property is held in a trust, it is important to consider state-based Land Tax implications. Land Tax rules differ across Australia, and in some jurisdictions, trusts are treated less favourably than individuals. In New South Wales, for instance, a discretionary (non-fixed) family trust does not receive the standard Land Tax-free threshold. This means Land Tax is generally assessed on the entire unimproved land value, rather than only on the value above a threshold. For property owners, this can significantly change the annual holding cost.
Similar variations apply in other States and Territories, and the outcomes depend on the type of trust and the elections made at establishment. These rules do not mean trusts are inappropriate, but they do reinforce the importance of reviewing structure in context rather than in isolation.
It is important to note that asset protection is not about avoiding responsibility. It is about sensible structuring. As businesses grow, so does their exposure. A structure that was appropriate at start-up may not provide adequate protection five or ten years later – particularly where property holdings have increased in value.
Reviewing asset ownership periodically ensures that the structure reflects not only risk management objectives, but also ongoing taxation implications.
Income Distribution Flexibility
Another commonly discussed benefit of trusts is income distribution flexibility.
A discretionary trust allows the trustee to determine how income is distributed among eligible beneficiaries each year. This can provide flexibility where family members are in different marginal tax brackets, or where income needs vary between years.
However, it is important to approach this carefully. Trusts do not eliminate tax. Income distributed through a trust is taxed in the hands of the beneficiary who receives it. The trust simply provides flexibility in allocation, subject to legislation and anti-avoidance rules.
It is also important to recognise that trust flexibility is not unlimited. For certain service-based businesses, the Personal Services Income (PSI) rules may restrict how income can be distributed, regardless of structure. Where PSI applies, income may need to be attributed to the individual who generated it.
This is why structure should always be reviewed in context. Establishing a trust does not automatically change how income is assessed. Alignment with current legislation is essential.
In addition, the ATO has recently issued updated guidance on income splitting arrangements involving personal services businesses such as trades, consultants, doctors and solicitors. Even where a business satisfies the PSI business tests, distributions may still be subject to scrutiny if they do not reflect commercial substance or arm’s length principles. The ATO’s guidance focuses on whether profit allocations align with the value of services performed, risk assumed, and capital contributed.
This represents a shift in emphasis. Passing PSI tests alone is no longer the end of the conversation. Trustees must now consider whether distributions are commercially justifiable in light of the ATO’s published risk assessment framework.
For professional practices in particular – including medical, legal and consulting firms – this means profit allocation policies should be clearly documented and capable of explanation. Where income is distributed to related parties, there should be a defensible commercial basis.
Distribution decisions must also be properly documented and resolved before the end of each financial year. Failing to complete trust resolutions correctly can lead to unintended tax consequences. Administration matters just as much as structure.
For professional practices and family-run enterprises, clear documentation of distribution policy reduces misunderstanding between stakeholders and provides protection if arrangements are reviewed.
Trust flexibility remains a legitimate feature of discretionary structures – but it now operates within a more defined compliance environment. Regular review ensures that flexibility remains aligned with current guidance rather than historical assumptions.
Succession Planning and Intergenerational Transition
Trusts are frequently used in long-term family and succession planning.
In vineyard businesses, primary production enterprises and equine operations, assets are often intended to remain within the family across generations. A trust structure can assist in maintaining continuity while allowing operational control to transition gradually.
For example, adult children may become involved in management while older generations retain oversight through trustee roles. Alternatively, income distributions can support family members while ownership structures remain stable.
That said, succession planning within trusts requires careful thought. The trust deed, appointor roles and trustee succession arrangements must be reviewed to ensure control passes as intended. Without clear documentation, disputes can arise at times of change.
A trust can support succession – but only if governance arrangements are clearly understood.
Administration and Ongoing Responsibility
One of the most common misconceptions is that once a trust is established, it requires little further attention.
In practice, trusts require ongoing administration. This includes:
• Preparing annual financial statements
• Completing trust distribution resolutions correctly and on time
• Maintaining accurate records of beneficiary entitlements
• Ensuring assets are legally owned by the trust
• Reviewing the trust deed periodically
Where documentation is inconsistent or outdated, the integrity of the structure can be weakened.
We often see trusts that were appropriate when established but have not been reviewed in light of growth, legislative change or family circumstances. Businesses evolve. Structures should be reviewed accordingly.
When Does a Trust Make Sense?
There is no universal answer. A trust may be appropriate where:
• Asset protection is a priority
• Family income distribution flexibility is beneficial
• Long-term intergenerational planning is intended
• Business risk has increased
• Significant assets are being accumulated
Conversely, a trust may not be appropriate where simplicity is paramount or where administrative requirements outweigh potential benefits.
The right question is not whether a trust “saves tax.” It is whether the structure aligns with your objectives.
Does it provide appropriate protection for the level of business risk?
Does it support future succession plans?
Does it create clarity, or does it add unnecessary complexity?
Reviewing Trusts in February
February is often an ideal time to review existing structures. The year is underway, but there is still time before 30 June to make considered adjustments if needed.
A structured review might involve:
• Confirming the trust deed remains current
• Reviewing beneficiary classes
• Assessing asset ownership alignment
• Considering future succession intentions
• Ensuring administrative processes are functioning properly
Structural decisions are best made calmly and with context. Leaving review until late June limits flexibility.
At Palfreyman CA, our approach is to explain structures clearly and practically. We believe business owners should understand not only how their trust operates, but why it exists. When a trust is aligned with long-term objectives and maintained carefully, it provides stability and flexibility.
Trusts are not about complexity for its own sake. They are about creating a framework that supports measured growth, sensible risk management, and thoughtful succession.
And like most structural decisions, they work best when reviewed steadily – not in response to pressure.
