What is a Discretionary Trust?

A discretionary trust is a type of trust where the trustee is given discretion in relation to the distribution of monies to the beneficiaries. This discretion includes whether or not monies are distributed, and if so, how much each beneficiary receives.

What are the Benefits?

It is no secret that there are benefits to a discretionary trust. Benefits of a discretionary trust include:

  • the ability to obtain tax benefits;
  • the ability to protect assets against creditors; and
  • the ability for succession planning.

How Can it Help Me Reduce Tax?

For the purpose of this article, we’ll focus on 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’s circumstances.

A discretionary trust is used by some individuals as a tax rate arbitrage tool.

This is best explained using an example.

Let’s suppose you are a middle-aged man with a high-income of $250,000 p.a., falling well within the highest tax bracket. You also have a wife who works as a clerk and earns $60,000 p.a. and 3 kids who each have part-time jobs but are not making significant amounts of money.

You’ve got a sum of money saved up and you want to invest in some shares.

You decide to set up a discretionary trust which holds shares and other investments. When you start obtaining returns on these shares and investments, these returns go into the trust as trust money. If you set yourself up as the trustee of the discretionary trust, it is at your discretion what you do with that money and how it is distributed.

If you distribute money from the trust to yourself, it will be taxed in the highest tax bracket so you probably wouldn’t want to do that. You can distribute this money to your wife and your children, and as they are on lower incomes, they will be taxed at significantly lower tax rates.

Key Takeaways

Discretionary trusts allow you to distribute your income to other people. This can be used to reduce your tax rate by redistributing your income so that it is taxed at a lower bracket.

If you need advice on how to set up a discretionary trust, call LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

Get a Free Quote Now

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • We will be in touch shortly with a quote. By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.

Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy