An indepth look at discretionary trusts – the pros and cons

Also known as a family trust, discretionary trusts are utilised by a not insignificant number of Australian businesses. The structure of a discretionary trust makes it particularly attractive for use within family businesses.

Before we go on any further, here’s an infographic to quickly sum up the structure of a trust and the role of people involved.

Because every situation is unique, the arrangement of a discretionary trust may not be suitable for you and/or your business, but some do find it preferable. To help you, we’ve broken down the pros and cons of a discretionary trust.

PROS – accumulation of assets for beneficiaries unlike some business situations, the discretionary trust allows for assets to be distributed to the beneficiaries without any significant effects tax wise. – flexibility over income and capital distribution the trustees are given discretion in how much they distribute to which beneficiaries so these are allowed to be modified without having to implement any major changes each time – uncomplicated reporting a large number of reports can be simplified – discount on capital gains the capital gains of the disposal of assets held by a trust for longer than 12 months is entitled to a discount

CONS – beneficiaries lack legal interest in trust because of the same flexibility that allows the trustees discretion in the distribution of allocations, beneficiaries cannot rely on receiving their “share” (see the case of Kennon v. Spry [2008] HCA 56) – distribution tax applies when distribution is made outside of the “family group” according the the website of the Australian Taxation Office (ATO): “A consequence of making a family trust election is that any distributions (broadly defined) outside the family group of the family trust by the trust will be taxed at the top marginal rate applying to individuals plus the Medicare levy.” – compliance obligations by running a discretionary trust, business owners become responsible for added obligations that can interfere with the running of a business


The discretionary trust is most suited to someone who prefers flexibility. As always, it is best to seek professional advice before pursuing this course of action.

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