Family trusts are a common vehicle for holding shares in Australian companies, particularly in family-owned businesses, startups, and succession-heavy industries. While this structure offers tax and estate planning advantages, it also raises compliance and governance obligations under Australian law. This article outlines how a family trust may hold company shares, the associated legal mechanics, tax implications, corporate governance considerations, and the steps required to structure such an arrangement, in compliance with the Corporations Act 2001 (Cth) and relevant tax legislation.
Legal Structure: Trusts as Shareholders Under Australian Law
A trust is not a legal entity in itself. Shares are held by the trustee, who is the legal shareholder, on behalf of the beneficiaries. The company’s share register will reflect this with a designation such as:
“XYZ Pty Ltd <as trustee for the Smith Family Trust>”
- The trustee exercises shareholder rights (voting, dividends, attendance).
- The beneficiaries hold only a beneficial interest and have no direct legal rights against the company.
- The trust deed governs how the trustee manages those rights.
The Corporations Act 2001 (Cth) permits non-beneficial ownership. In a proprietary limited company, the trustee is considered one member for the purposes of shareholder limits. In a publicly listed company, shareholdings above 5% trigger substantial holding disclosure obligations under Part 6C.1 of the Act.
Tax Treatment: Income, Capital Gains and Compliance
Family trusts are treated as flow-through entities under the Income Tax Assessment Acts 1936 & 1997 (Cth).
Distributions
- Dividends received by the trust are assessable income.
- The trustee may distribute income to beneficiaries in accordance with the trust deed.
- Franking credits may pass through if distribution conditions are met (per ATO rulings TR 2012/D1 and IT 328).
Capital Gains
- Capital gains from share disposals are taxed in the trust and may be distributed.
- The 50% CGT discount applies if the asset has been held for 12+ months.
- Undistributed income is taxed at the top marginal rate (47%).
ATO Compliance
The trustee must resolve distributions by 30 June each year, maintain detailed records, and ensure compliance with anti-avoidance provisions, including section 100A (reimbursement agreements) and Part IVA (general anti-avoidance rules). ATO scrutiny is heightened where trusts are used solely for tax minimisation.
Governance and Corporate Law Considerations
While family trusts offer structural flexibility, their role as company shareholders must align with corporate governance norms. The following section outlines how trustees exercise shareholder rights and manage legal duties under Australian law.
Voting Rights
The trustee exercises all shareholder rights, including attending meetings and voting on resolutions. These rights must be exercised in good faith and in accordance with the fiduciary duties imposed under trust law.
Conflicts of Interest
Where the trustee (or a director of the trustee company) is also a director of the investee company, they owe concurrent but distinct duties:
- Under s180–184 of the Corporations Act, to act in good faith in the company’s best interests.
- Under equitable trust law, to act in the best interests of beneficiaries.
Any potential or actual conflict must be disclosed under s191 of the Act, and the conflicted individual may be required to abstain from certain decisions.
Shareholder Agreements
The trustee must be party to any shareholder agreement, and the trust deed must permit the trustee to enter into binding arrangements of this nature. In complex joint ventures, careful drafting is required to avoid invalidity or unenforceability.
ASIC and Company Records
- Shares held in trust must be recorded as non-beneficially held on ASIC registers.
- Changes in trustee or trust control may require updates within 28 days under s178C of the Corporations Act.
- Beneficiaries are not required to be disclosed publicly, but may be subject to disclosure in litigation or regulatory settings.
Use Cases Across Australian Business Sectors
The trust-as-shareholder model is used across various industries in Australia, from family businesses to high-growth tech startups. Below are typical use cases where this structure adds legal and strategic value.
Family-Owned Enterprises
A family trust allows unified control of the business and facilitates intergenerational succession without fragmenting share ownership. This approach is different from using an investment company, which centralises ownership in a corporate entity but lacks the same flexibility in distributing income among family members.
Founders and Startups
Holding equity through a trust provides tax flexibility on exit and protects shares from personal liabilities. Most venture capital firms accept trust-held shares, provided documentation is complete.
Succession-Heavy Industries
In sectors like farming, real estate development, and professional services, trusts allow continuity of ownership, with control of the trust (not the company) passing between generations, thus avoiding the need to transfer shares.
Establishing a Family Trust as Shareholder
Establishing a family trust as a shareholder requires careful legal and tax planning. This step-by-step guide outlines the correct setup process to ensure compliance and avoid future disputes.
- Create the Trust
- Draft a deed that explicitly allows the trust to hold company shares.
- Appoint a trustee (individual or corporate).
- Appoint an appointor if control separation is desired.
- Issue or Transfer Shares
- For new companies: issue shares to the trustee on incorporation.
- For existing companies: execute a share transfer to the trustee (note CGT and potential stamp duty).
- Update ASIC and Company Register
- Ensure shares are recorded as “not beneficially held.”
- Use ASIC Form 484 for notifications within statutory timeframes.
- Ongoing Governance and Tax Compliance
- Maintain trustee minutes.
- Prepare annual financial statements and tax returns.
- Comply with ATO guidelines and monitor any changes in tax law or case precedent.
FAQs: Family Trusts as Shareholders
Family trusts as company shareholders raise common questions about control, voting, compliance, and benefits. The FAQs below address key legal and tax considerations for both trustees and beneficiaries.
Can a family trust be a shareholder in a private or public company?
Yes. The trustee is recorded as the shareholder. Trusts may hold shares in both private and publicly listed companies under Australian law.
Does a family trust have voting rights?
Yes, but only through the trustee. Beneficiaries do not hold shareholder rights directly.
Are there tax advantages?
Yes. Income splitting, CGT concessions, and franking credit streaming are available – subject to compliance.
Can a family trust be a silent partner?
Yes. Trusts may hold shares passively and receive dividends, without engaging in active management.
What are the risks?
Risks include mismanagement by the trustee, failure to comply with ASIC or ATO obligations, fiduciary breaches in dual roles, and risks when the company becomes insolvent, as creditors may challenge transactions or question whether trust-held shares should be accessible.
Conclusion
Family trusts are a legally robust vehicle for holding company shares in Australia. They enable effective tax planning, asset protection, and structured succession. However, they must be correctly structured and administered in line with the Corporations Act, trust law, and Australian tax legislation. For tailored advice on setting up or managing such structures, finding a good family lawyer can help ensure compliance and protect your family’s long-term interests.
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