Skip to content

How Does a Discretionary Trust Help Me Reduce My Tax?

It is common for a founder to hold the shares they own in their company through a discretionary family trust. Accountants and lawyers alike recommend this type of structure due to the tax benefits and asset protection it brings. 

A discretionary trust can also be a useful vehicle for estate planning purposes. This article will discuss some of the tax benefits of a discretionary trust. This article is not tax advice. It is best to obtain your own accounting and tax advice that applies to your business and personal circumstances.

What is a Discretionary Trust?

A discretionary trust gives a trustee the discretion to distribute income or property to beneficiaries of the trust. This discretion includes whether to distribute monies in a certain income year and how much each chosen beneficiary receives. 

The “key players” in a discretionary trust are:

  • the trustee – the person or entity that manages the trust and has the ultimate discretion when it comes to distributing trust income or capital;
  • beneficiaries – the people or entities entitled to benefit from the income or capital of the trust and may receive distributions. It is important to remember that these people generally do not have any fixed entitlement to trust income;
  • appointor – not all discretionary trusts have an appointor. If it does, that person usually has the ability to fire and hire the trustee; and
  • settlor – the person who establishes the trust by giving the initial property to the trust.  The settlor then has nothing further to do with the trust and can never benefit from it.

It is important to remember that a trust in and of itself is not a legal entity. As such, the trustee will own all of the trust’s property on behalf of the trust. 

What are the Tax Benefits of a Discretionary Trust?

The tax benefits are not actually realised by the trust itself but rather for the trust’s beneficiaries. A discretionary trust allows the trustee to distribute income to the beneficiaries in its absolute discretion. This can be useful for beneficiaries on different income tax brackets. Consequently, a trustee can “spread out” the income to the various beneficiaries, meaning beneficiaries pay less tax in total on any income the trust receives.

However, a trustee of a discretionary trust should be wary of entering into any arrangement that could trigger the anti-avoidance provision in the Income Tax Assessment Act 1936 (Cth) (the Act). Broadly, the Act seeks to prevent a tax benefit from arising under a pre-existing agreement between multiple people where:

  • a beneficiary is presently entitled to a share of the trust’s income (for example, because the trustee resolves to distribute that income to the beneficiary);
  • a party, other than the beneficiary, receives a benefit in some way (for example, the beneficiary then transfers the income to someone else); 
  • at least one party to the agreement has a purpose of reducing the amount of tax that might have otherwise been paid; and 
  • the agreement was not entered into during ordinary or family dealings. 

If the ATO audits an arrangement and decides the Act applies, the high-level implication is that the beneficiary is deemed to have never been presently entitled to that share of trust income. Likewise, the trustee is assessed at the highest marginal rate (47%).

The ATO has released Practical Compliance Guideline 2022/2, which sets out the factors it will consider in determining whether to dedicate any compliance resources to its investigation.

Continue reading this article below the form
Loading form

Other Considerations When Utilising a Discretionary Trust

Trusts are not always appropriate in all circumstances. Ultimately, it is essential you get your own tax and legal advice before establishing a discretionary trust. These are additional administrative costs in maintaining a trust. So, you should weigh these against the benefits of setting one up (tax benefits, asset protection and estate planning benefits). 

If you choose to set up a discretionary trust, there are some essential things to remember:

  • if the trustee does not distribute 100% of the trust income in a financial year, they will be taxed at the highest marginal rate on that income; 
  • if the trustee distributes any income to minors, those minors will be subject to the highest marginal tax rate; and 
  • if you act as the trustee of your trust, you owe certain duties to the trust and its beneficiaries. There can be serious consequences if you fail to uphold these duties.
Front page of publication
Corporate Governance Essentials

This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.

Download Now

Key Takeaways

A discretionary trust is a common way to hold your shares and investments. They can offer both tax and asset protection advantages. The tax benefits arise because a trustee can distribute trust income to different beneficiaries with different income tax brackets. This spreads out the tax liability potentially payable on the income, which can be reduced to nil if distributed to beneficiaries who do not earn enough to pay any income tax. However, a trustee must be careful not to enter anything that could trigger the anti-avoidance provision in the Income Tax Assessment Act 1936 (Cth). Otherwise, the tax liability will shift back to the trustee. 

It is essential you get your own tax and legal advice before setting up a trust to ensure it is right for your circumstances. For more information, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a discretionary trust?

A discretionary trust is a type of trust where the trustee has discretion over the distribution of monies to the beneficiaries. This discretion includes whether or not to distribute monies and, if so, how much each beneficiary receives. 

What are the tax benefits of using a discretionary trust?

The main tax benefit of a discretionary trust is the trustee’s ability to distribute income to different beneficiaries, who will then be taxed at their own marginal tax rate. Depending on the beneficiaries ‘ circumstances, this spreads out the tax liability and can even reduce it to nil.

Can I distribute the trust income to anyone?

A trustee can only distribute trust income to a beneficiary under the trust deed. For the most part, the trustee has the ultimate discretion to choose which beneficiaries (if any) receive trust income. However, any distributions to minors will be subject to the highest marginal tax rate.

Register for our free webinars

Demystifying M&A: What Every Business Owner Should Know

Online
Understand the essentials of mergers and acquisitions and protect your business value. Register for our free webinar.
Register Now

Social Media Compliance: Safeguard Your Brand and Avoid Common Pitfalls

Online
Avoid legal pitfalls in social media marketing and safeguard your brand. Register for our free webinar.
Register Now

Building a Strong Startup: Ask a Lawyer and Founder Your Tough Questions

Stone & Chalk Tech Central, Level 1 - 477 Pitt St Haymarket 2000
Join LegalVision and Bluebird at the Spark Festival to ask a lawyer and founder your startup questions. Register now.
Register Now

Construction Industry Update: What To Expect in 2026

Online
Stay ahead of major construction regulatory changes. Register for our free webinar.
Register Now
See more webinars >
Thomas Linnane

Thomas Linnane

Senior Lawyer | View profile

Thomas is a tax and corporate senior lawyer. He is the first point of contact for business structuring, startup and tax enquiries at LegalVision. Thomas has a passion for maximising client experience and satisfaction, and for helping a diverse range of people with their legal needs.

Qualifications: Bachelor of Laws, Bachelor of Media, University of New South Wales.

Read all articles by Thomas

About LegalVision

LegalVision is an innovative commercial law firm that provides businesses with affordable, unlimited and ongoing legal assistance through our membership. We operate in Australia, the United Kingdom and New Zealand.

Learn more

We’re an award-winning law firm

  • Award

    2025 Future of Legal Services Innovation Finalist - Legal Innovation Awards

  • Award

    2025 Employer of Choice - Australasian Lawyer

  • Award

    2024 Law Company of the Year Finalist - The Lawyer Awards

  • Award

    2024 Law Firm of the Year Finalist - Modern Law Private Client Awards

  • Award

    2022 Law Firm of the Year - Australasian Law Awards