Reading time: 2 minutes

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.

Webinars

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

Online
If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Online
Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Online
Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards