Family Trust vs Business Trust in Australia | Legal Comparison

Despite this singular legal concept, practice distinguishes between different applications of the trust structure.

Two categories dominate the landscape: the family trust, primarily used for private wealth and estate planning, and the business trust, used as a commercial trading or investment vehicle.

While both fall under the general law of trusts and Division 6 of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”), their practical operation and tax treatment differ significantly.

What Is a Family Trust?

A family trust in Australia is most commonly a discretionary trust established by deed for the benefit of a defined family group.

The defining features are:

• Discretionary distributions: The trustee determines, in its discretion, which beneficiaries receive income or capital each financial year.
• Trustee powers and duties: The trustee (often a corporate trustee) has legal ownership of trust property, owes fiduciary duties, and must exercise discretion in good faith and in accordance with the deed.
• Appointor/Principal role: Many deeds name an appointor with the power to remove and appoint trustees. In practice, this is the ultimate control mechanism, making appointor succession critical in estate planning.
• Beneficiaries: Generally confined to a family group, but the deed may include spouses, children, companies, and trusts associated with family members.

Family Trust Election (FTE)

Under Schedule 2F of the ITAA 1936, trustees may lodge a Family Trust Election with the ATO. This has two main effects:

1. It grants access to concessions (e.g. trust loss rules, franking credit streaming).
2. It restricts distributions to members of the specified family group. Distributions outside that group are subject to Family Trust Distribution Tax (FTDT) at 47%.

Common uses of Family Trust

• Holding investment property, shares, or intellectual property in a protected structure.
• Running small family businesses through a discretionary trading trust, where many individuals shift from sole trader to trust for better asset protection and tax flexibility.
• Estate planning: trust assets typically sit outside the estate and therefore bypass probate. Control passes through appointor provisions or shareholdings in the corporate trustee, rather than via a will.

What Is a Business Trust?

The term business trust is not a formal category under Australian trust law but a description of a trust structure used to conduct business activities. In practice, there are three forms:

1. Discretionary Trading Trust
   
   • Typically used by families running a business.
   • Trustee (often corporate) operates the business, with profits distributed on a discretionary basis.
   • Offers flexibility in income splitting but exposes trustee to operational liabilities.
2. Unit Trust
   
   • Beneficiaries hold units representing fixed entitlements to income and capital.
   • Commonly used for joint ventures or property syndicates where unrelated parties require certainty of return.
   • Unit-holders’ rights are governed by both the deed and any unit-holder agreement (similar to a shareholders’ agreement).
3. Public Trading Trust (Division 6C ITAA 1936)
   
   • A unit trust that meets statutory criteria for carrying on trading activities.
   • Treated as a corporate tax entity for income tax purposes.
   • Must lodge a company return and is subject to company tax rates and franking credit system.

Side-by-Side Comparison: Family Trust vs Business Trust

Before contrasting the two, it is important to note the decision-making framework:

• Who are the owners? (family members vs unrelated investors).
• What is the purpose? (wealth preservation vs commercial trading).
• How should profits be shared? (flexible vs fixed entitlements).
• What is the risk profile? (asset holding vs business operations).

These considerations determine which trust structure is legally and commercially appropriate and why it is also compared with an investment company when deciding the most effective vehicle.

Family Trust (Discretionary)

• Purpose: Wealth and estate planning for family.
• Beneficiary Rights: Discretionary; beneficiaries have no fixed entitlement.
• Control: Managed by trustee discretion, with appointor holding overriding power.
• Taxation: Governed by Division 6 ITAA 1936; income flows through to beneficiaries; family trust election (FTE) may apply.
• Asset Protection: Assets are generally protected from beneficiaries’ creditors.
• Succession: Control passes through the appointor role or via corporate trustee shares.

Business Trust – Unit Trust

• Purpose: Designed for business or investment ventures between unrelated partners.
• Beneficiary Rights: Fixed entitlements based on units held.
• Control: Trustee bound to act according to unit entitlements.
• Taxation: Income flows through to unitholders per their ownership.
• Asset Protection: Units may be charged or used as security, offering less protection.
• Succession: Governed by the unit-holder agreement.

Business Trust – Public Trading Trust

• Purpose: Used for widely held trading enterprises.
• Beneficiary Rights: Fixed entitlements based on units.
• Control: Trustee governed by Division 6C rules.
• Taxation: Taxed in the same way as a company.
• Asset Protection: Operates in a company-like structure.
• Succession: Follows corporate succession rules.

Tax Differences Between Family Trust and Business Trust

The taxation of trusts in Australia hinges on present entitlement and statutory provisions in the ITAA 1936.

Before examining each trust type, it is critical to understand the core legal principle: unless the trust qualifies as a public trading trust, net income flows to beneficiaries who are presently entitled, while undistributed amounts are assessed to the trustee at the top marginal rate.

Family Trust

• Governed by Division 6 ITAA 1936.
• Income and capital can be streamed if the deed permits.
• Beneficiaries are taxed at individual marginal rates.
• Trustee pays top marginal rate on undistributed income.
• FTE narrows distribution options but enables access to franking credits and loss concessions.

Discretionary Trading Trust

• Taxed in the same manner as a family trust.
• Trustee discretion determines beneficiary entitlements each year.
• Used for family businesses where flexibility is preferred.

Unit Trust

• Beneficiaries taxed according to their fixed unit entitlements.
• More predictable tax outcomes, useful for external investors.
• Transfers of units may attract CGT or stamp duty.

Public Trading Trust

• Specifically treated as a company under Division 6C ITAA 1936.
• Taxed at corporate rate; distributions subject to franking credit system.
• Must comply with corporate reporting requirements.

Asset Protection in Family Trust vs Business Trust

Before comparing family trusts and business trusts on asset protection, it is essential to recall that all trusts operate on the legal separation between legal ownership (trustee) and beneficial ownership (beneficiaries).

This separation creates protective effects, but it does not immunise the trustee from liability.

The way these principles play out differs depending on whether the trust is used for family wealth or business trading activities.

• Family Trusts: Assets are typically safeguarded from beneficiaries’ personal creditors, as no beneficiary has a fixed entitlement. However, the trustee remains personally liable to third-party creditors unless indemnified by trust assets.
• Business Trusts: Because business trusts actively engage in commercial dealings, exposure to liability is higher. Creditors may pursue the trustee directly. Using a corporate trustee is legally prudent, and in unit trusts, creditors may also secure interests over units themselves.

Estate Planning and Probate Avoidance

Under Australian succession law, assets held by a trust are non-estate assets. They do not pass under a will and are not subject to probate. Control instead passes through:

• Appointor provisions in the deed;
• Shareholding in the corporate trustee;
• Unit-holder agreements in the case of unit trusts.

This mechanism allows families to bypass probate delays and reduce risk of estate disputes.

How to Establish and Registering a Trust

The legal process requires:

1. Drafting a valid trust deed with powers and limitations aligned to the purpose.
2. Executing the deed with a settlor and trustee.
3. Establishing a corporate trustee (if chosen) under the Corporations Act.
4. Applying for a TFN and lodging annual trust returns.
5. Applying for an ABN and GST registration if carrying on an enterprise.
6. Observing state-based stamp duty rules for trust deeds.

Costs and Ongoing Legal Compliance in Family Trust vs Business Trust

The financial and administrative burden of running a trust differs depending on whether it functions as a family trust or a business trust.

Families often seek lower-cost structures for passive asset holding, whereas business trusts require additional registrations and compliance due to trading activities.

• Initial costs: Legal drafting, corporate trustee incorporation, stamp duty.
• Ongoing costs: ASIC annual review fees, ATO reporting, BAS/IAS for trading trusts, payroll obligations, annual resolutions documenting present entitlement.
• Legal risk: Invalid or late distribution resolutions can result in trustee assessments at punitive rates.

Choosing the Appropriate Trust Structure

Selecting between a family trust and a business trust is not a matter of preference but of legal purpose.

The structure must align with the nature of ownership, the intended activity, and the level of risk that requires management.

A misaligned choice may expose beneficiaries to unnecessary tax burdens or leave assets vulnerable to claims.

• Family trust: appropriate where related parties want flexibility in distributions and asset protection.
• Unit trust: appropriate where unrelated parties or investors require fixed entitlements.
• Public trading trust: required where a widely held unit trust carries on trading activity.

The decision should be based on purpose, control, taxation, and risk profile.

FAQs: Family Trust vs Business Trust in Australia

Australians frequently search for practical distinctions between family trusts and business trusts. Below are answers to the most common queries, framed with legal precision and focused on how the law treats each structure.

What is the main difference between a family trust and a business trust?

A family trust is a discretionary trust for family wealth, while a business trust operates as a commercial trading or investment vehicle, often structured as a unit trust.

How are family trusts and business trusts taxed?

Both flow income to beneficiaries under Division 6 of ITAA 1936, unless classified as a public trading trust, in which case the trust is taxed like a company.

Do trusts avoid probate?

Yes. Assets held in trusts are non-estate assets and generally bypass probate. Control is exercised through deed provisions and trustee structures.

Which structure offers stronger asset protection?

Family discretionary trusts provide strong protection by limiting fixed entitlements. For trading activities, corporate trustees are essential to mitigate liability.

How much does it cost to establish each trust?

Family trusts are generally simpler and less costly to establish. Business trusts require additional registrations and often corporate trustee structures, making them more expensive.

Conclusion

In Australian law, both family trusts and business trusts operate under the same legal principles but serve markedly different purposes. A family trust is best suited for wealth management, income distribution, and estate planning, while a business trust is designed for trading and investment ventures, often with multiple unrelated parties.

Choosing the correct structure requires careful analysis of the trust deed, tax obligations, fiduciary duties, and succession planning goals. For families considering these issues, finding a good family lawyer is an important step to ensure the trust aligns with long-term wealth and estate planning objectives.