What Is a Family Trust and How Does It Work?

A family trust, also known as a discretionary trust, is a popular legal structure in Australia used to hold assets and operate businesses. The trustee has absolute discretion over how much income and capital each beneficiary receives each year.

Unlike a company, a trust is not a separate tax entity. Instead, the trust distributes its net income to beneficiaries, who then pay tax at their own marginal tax rates. This flexibility is the main reason families use trusts for tax planning.

Most family trusts operate with a corporate trustee for asset protection and a trust deed that lists eligible beneficiaries. The trustee decides the distribution split before the June 30 deadline each financial year.

Trusts are especially useful when family members have uneven incomes or when you want to protect assets from creditors. They also play a key role in estate planning and intergenerational wealth transfer.

FY 2025-26 Tax Rates for Trust Beneficiaries

When a family trust distributes income to beneficiaries, each beneficiary pays tax at their personal marginal rate. The FY 2025-26 rates (Stage 3 Tax Cuts) are as follows:

Children under 18 receiving trust income face higher tax rates on unearned income over $416 (except for excepted income). This is known as the minor tax rules, and it limits how much you can distribute to children without triggering penalty rates of up to 66%.

The tax-free threshold of $18,200 means you can distribute up to this amount to adult beneficiaries with no other income without triggering any tax. This is one of the most powerful features of family trust tax planning.

Key Tax Planning Strategies for Family Trusts

Income Splitting Between Beneficiaries

The most common strategy is distributing trust income to family members in lower tax brackets. For example, if you earn $180,000 and your spouse has no income, distributing $45,000 to your spouse saves approximately $8,000 in combined tax compared to receiving all income yourself.

Use our take-home pay calculator to see exactly how much tax each beneficiary would pay on different distribution amounts. This helps optimise the total family tax outcome.

Streaming Capital Gains and Franked Dividends

Trusts can stream different types of income to different beneficiaries. This means you can send capital gains to beneficiaries with unused capital losses, or send franked dividends to low-income beneficiaries who can benefit from franking credit refunds.

Each beneficiary receives the benefit of the 50% CGT discount on capital gains from assets held longer than 12 months. This makes trusts a powerful vehicle for investment portfolios.

Using the LITO Offset

The Low Income Tax Offset (LITO) provides up to $700 for beneficiaries with taxable income under $37,500. It phases out completely at $66,667. By distributing income strategically, you can ensure more family members qualify for this offset.

See our income tax page for a full breakdown of how offsets interact with marginal tax rates.

Trust Tax Returns and Compliance Requirements

Family trusts must lodge an annual trust tax return with the ATO. The trust itself does not pay tax on distributed income, but the trustee must prepare a distribution minute before June 30 specifying each beneficiary's entitlement.

Key compliance deadlines for FY 2025-26 include:

• Trust tax return due: 15 May 2026 if using a tax agent (or 31 October 2025 if self-preparing)
• Distribution resolution: Must be made before 30 June 2026
• Beneficiary payment: Must be paid or made available by 30 June 2026
• PAYG instalments: Quarterly or annual, depending on trust income

Failure to make a valid distribution resolution before year-end can result in the trustee paying tax at the highest marginal rate (45%) on all undistributed income. This is known as trustee penal rates.

Unresolved trust income at year-end is taxed at 47% (including the Medicare levy). This is a common trap for DIY trustees who miss the June 30 deadline for distribution minutes.

Family Trust vs Other Business Structures

Many Australians compare trusts with companies and sole trader structures when starting a business. Each structure has different tax implications for FY 2025-26.

One major advantage of a family trust over a company is that trust distributions retain the character of the income. For example, if the trust receives a franked dividend, the beneficiary receives the franking credit attached to it.

Companies pay tax at a flat rate (25% for base rate entities, or 30%), but profits distributed as dividends are taxed again in the shareholder's hands. This contrasts with trusts where income is only taxed once — at the beneficiary level.

Superannuation Contributions Through a Family Trust

Family trusts can make contributions to a superannuation fund on behalf of beneficiaries. However, there are strict rules about how trust distributions can be directed into super.

Beneficiaries can choose to salary sacrifice part of their trust distribution into super, subject to the concessional contributions cap of $30,000 for FY 2025-26. This strategy is particularly effective for beneficiaries aged 60 and over who can also access the downsizer contribution rules.

Trustees should be aware that super contributions must be made from the beneficiary's share of trust income, and that the contribution must be received by the super fund before 30 June to count toward that year's cap.

Frequently Asked Questions

Can a family trust distribute to a company?

Yes, a family trust can distribute to a corporate beneficiary (often called a bucket company). The company pays tax at the corporate rate on trust distributions, and those profits can be retained for reinvestment or later distributed as franked dividends to family members.

What is the 50% CGT discount for family trusts?

Family trusts are eligible for the 50% CGT discount when they sell assets held for longer than 12 months. The discount flows through to beneficiaries based on their share of the capital gain. This makes trusts highly effective for long-term investment property and share portfolios.

Are family trusts still worthwhile after Stage 3 tax cuts?

Yes, family trusts remain valuable even with Stage 3 tax cuts. While the 16% and 30% brackets are lower than before, income splitting still delivers significant savings when one family member has a high income and another has little or no income. The $18,200 tax-free threshold remains a powerful planning tool.

What happens if a trust distribution is unpaid?

If a beneficiary is entitled to trust income but does not physically receive it, the amount is still assessable income for that beneficiary. Unpaid distributions create a loan or unpaid present entitlement (UPE), which may trigger Division 7A issues if the trust has a corporate beneficiary.

Can a family trust reduce Medicare Levy?

Yes, by distributing income to lower-income beneficiaries, the overall family Medicare Levy payable can be reduced. Each beneficiary with income below the Medicare Levy threshold of $27,222 is exempt from the 2% levy. Check our Medicare Levy guide for full details on thresholds and exemptions.