Under Australian law, a salary cannot be paid directly into a family trust. Employment income must be received by the individual employee and taxed as personal income under PAYG rules. A family trust can only receive income that arises from business operations, investments, or post-tax transfers.
However, once salary has been lawfully paid and taxed, individuals may transfer it into a family trust for purposes such as asset protection, investment management, or estate planning. Those uncertain about the legal process can explore finding a good family lawyer to obtain tailored advice and ensure compliance with Australian taxation and trust law.
The key legal distinction lies in the source of income — wages earned through employment belong to the individual, not the trust.
Legal Definition: Salary vs. Trust Income
Under Australian law, salary and trust income are legally distinct.
A salary is classified as personal income earned by an individual through employment under an employment contract. It represents payment for personal labour or services and is governed by the Fair Work Act 2009 (Cth) and PAYG tax obligations. The employee, as the legal earner, must receive this income directly, and it cannot be diverted to another entity such as a family trust.
By contrast, trust income refers to earnings generated by assets or business activities held within a trust — for example, rental income, dividends, or business profits. This income is received by the trustee on behalf of beneficiaries and distributed according to the trust deed and the Income Tax Assessment Act 1936 (Cth).
In simple terms, salary belongs to the person who earns it, while trust income belongs to the trust that generates it. This distinction forms the legal foundation for why wages cannot be paid directly into a family trust in Australia.
Is It Legal to Direct Salary Payments to a Family Trust?
In most circumstances, no — it is not lawful for an employer to pay a salary directly into a family trust account. The legal recipient of employment income is the person performing the work, not the trust or its trustee.
However, once received and taxed appropriately, that income may be transferred into a trust for legitimate purposes, such as investment, asset protection, or intergenerational wealth planning.
The only exception occurs where a trust is the genuine contracting entity. For example, if an individual provides professional services through a company acting as trustee for a family trust, and the company invoices clients directly, then income earned from that business activity can flow into the trust.
For PAYG employees, however, such redirection is not permitted, as the ATO considers employment income to be personally assessable.
Tax Implications of Paying Salary into a Family Trust
If an individual attempts to have their salary paid into a family trust, the Australian Taxation Office (ATO) is likely to treat the income as personal assessable income, regardless of where it is deposited.
This is grounded in the assignment of income principle, which prohibits a taxpayer from diverting income they have personally earned. The ATO may also apply Part IVA (the general anti-avoidance rule) of the Income Tax Assessment Act 1936 (Cth) if the arrangement appears intended to reduce tax liability.
Key tax outcomes include:
- No tax benefit — salary remains taxable in the hands of the individual earner.
- Potential penalties — arrangements viewed as artificial may trigger anti-avoidance provisions.
- Loss of deductibility — any associated expenses may be denied as deductions.
- ATO scrutiny — the trust may be audited for non-arm’s-length transactions.
Legal Requirements for Establishing a Family Trust for Income Distribution
Where the goal is to distribute income lawfully through a family trust, it must be established and operated as a business or investment structure, not an employment arrangement.
The process typically involves:
- Drafting a trust deed — outlining powers, trustee duties, and beneficiary rights.
- Appointing a trustee — preferably a Pty Ltd company to ensure limited liability and corporate governance.
- Settling the trust — through a nominal contribution to create legal effect.
- Obtaining a TFN and ABN — mandatory for taxation and reporting compliance.
- Executing a Family Trust Election (FTE) — to access tax concessions such as franking credits.
Once established, the trust can receive business income or investment returns, but not personal wages.
Legal Considerations and Compliance Risks
Assigning salary to a trust without a legitimate business basis can expose both the individual and trustee to legal and financial consequences, including:
- Breach of PAYG withholding and reporting obligations.
- Contravention of the Fair Work Act 2009 (Cth).
- Reassessment under Part IVA for tax avoidance.
- Loss of trust tax concessions or penalties for false declarations.
- Breach of fiduciary duty if the trustee acts outside the trust deed.
Lawyers specialising in trust and tax law consistently warn that misdirecting salary into a trust is not a compliant strategy. Instead, trust structures should focus on managing income generated from business or investment activities.
When a Family Trust Can Receive Income?
A family trust can legally receive income only when that income is generated by the trust itself through business, investment, or asset ownership — not through an individual’s employment.
For example, if a consultant or contractor operates through a company acting as trustee for a family trust, and that company invoices clients for services, the resulting business income belongs to the trust. This is because the trust, through its trustee, is the legal entity carrying on the business activity and earning the income.
However, if an individual is an employee receiving a salary under an employment contract, that income cannot be paid into the trust directly. The law treats it as personal income belonging to the employee, even if they later transfer it to the trust after tax.
In short, a family trust may receive business or investment income, but not wages or salaries earned personally. The determining factor is whether the trust, through its trustee, is the entity lawfully providing the services or holding the assets that generate the income.
Family Trust vs Self-Managed Super Fund (SMSF) for Income Splitting
Both family trusts and SMSFs are recognised structures for wealth management, but their legal functions differ:
- Family Trust: Allows income distribution to beneficiaries at the trustee’s discretion, but cannot receive employment income directly.
- SMSF: Operates under superannuation law and can lawfully receive employer contributions under the Superannuation Industry (Supervision) Act 1993 (Cth).
Therefore, while a trust offers flexibility for investment income, superannuation remains the lawful mechanism for redirecting employment-related income.
Lawful Alternatives for Using a Family Trust
Although salary cannot be paid directly into a family trust, individuals may still use trusts as part of legitimate wealth management by:
- Depositing after-tax income into the trust for investment.
- Acquiring property, shares, or managed funds through the trust.
- Integrating the trust into an estate plan to manage succession and inheritance.
- Operating a business via a corporate trustee, allowing income to flow naturally into the trust.
These approaches ensure compliance while maintaining the legal benefits of a family trust structure.
FAQs on Salary Payments and Family Trusts
Before implementing any structure involving salary and trusts, individuals should seek legal and accounting advice. The following clarifies key legal questions:
Is it legal to have my employer pay salary into a family trust?
No. Employment income must be paid directly to the employee. Redirecting it to a trust breaches both PAYG and employment law obligations.
Can I transfer my salary to a family trust after being paid?
Yes — but only after paying personal income tax. Transferring post-tax income into a trust for investment or estate planning purposes is permissible.
What are the tax implications of assigning salary to a trust?
The ATO will treat any assigned salary as personal income under the assignment of income doctrine, potentially invoking anti-avoidance provisions.
Can a family trust receive business income instead of salary?
Yes. If a trust operates a business and invoices for services, that income belongs to the trust. The structure must reflect genuine business activity.
What are the risks of funnelling salary through a trust?
The arrangement can trigger ATO investigation, tax penalties, or reclassification of income, and may also breach fiduciary duties or employment contracts.
How does a family trust differ from an SMSF for income management?
A family trust distributes profits from investments or business operations. An SMSF manages retirement savings and can receive employer contributions lawfully.
Key Legal Takeaway
Under Australian law, a salary cannot be paid directly into a family trust, as employment income is personal in nature. Trusts, however, remain valuable for managing business profits, investments, and family assets within a compliant framework.
For tailored legal guidance on structuring income and trusts, contact LegalFinda — Australia’s trusted platform connecting individuals with expert family and tax lawyers who ensure compliance with the Income Tax Assessment Acts and ATO guidelines.
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