- Income splitting lets you distribute to family members on lower marginal rates, but minors face penalty rates and the ATO polices sham arrangements.
- The 50% CGT discount on trust assets held over 12 months still applies for now, but is being replaced from 1 July 2027.
- Trusts cost money to run and follow strict distribution rules, so they suit genuine income-splitting and asset-protection needs, not everyone.
The tax benefits of a family trust in Australia come from three main levers: splitting income among family members on lower tax rates, accessing the 50% CGT discount on assets held over 12 months, and protecting assets from personal creditors. Each is real, but each comes with limits and anti-avoidance rules, and a family trust is not tax avoidance. Sleek sets up your trust and manages the distributions correctly so the benefits hold up. This guide walks through how each works and the catch that comes with it.
Not sure a family trust suits you?
- Income splitting lets you distribute to family members on lower marginal rates, but minors face penalty rates and the ATO polices sham arrangements.
- The 50% CGT discount on trust assets held over 12 months still applies for now, but is being replaced from 1 July 2027.
- Trusts cost money to run and follow strict distribution rules, so they suit genuine income-splitting and asset-protection needs, not everyone.
What are the tax benefits of a family trust?
A family trust can lower a household’s overall tax through income splitting, capital gains concessions, and asset protection, provided the distributions are genuine and properly documented. The trust itself generally pays no tax when it distributes all its income; the tax lands with the beneficiaries at their own rates.
That said, this is legitimate tax planning, not avoidance. The ATO scrutinises family trusts closely, and two reforms will narrow the benefits, one now law from 2027, one announced for 2028.
How does income splitting through trust distributions work?
Income splitting is the headline benefit: the trustee can distribute the year’s income among a class of beneficiaries, directing more to those on lower marginal rates so the family’s combined tax bill falls. A distribution to a low-income spouse or adult child is taxed at their rate, not the controller’s. The catch- Minors are penalised: unearned income distributed to a child under 18 is taxed at penalty rates up to 45% above roughly A$1,307, so distributing to young children does not work.
- Section 100A: if income is distributed to a low-rate beneficiary on paper but someone else gets the benefit, the ATO can ignore it and tax the trustee at 47%.
- Resolutions must be genuine and on time: distributions have to be validly resolved by year end and the beneficiary must actually benefit.
How does the 50% CGT discount on trust assets work?
When a family trust sells an asset it has held for more than 12 months, the 50% CGT discount can flow through to individual beneficiaries, halving the taxable gain. The trustee can even stream a capital gain to a specific beneficiary, for example one with capital losses or a low income, to reduce the tax further.
The catch
- Companies miss out: a corporate beneficiary does not get the 50% discount, so streaming a gain to a bucket company loses it.
- Reform is coming: the ATO has confirmed the 50% discount still applies for Tax Time 2026, but from 1 July 2027 it is being replaced for individuals and trusts by cost-base indexation plus a 30% minimum tax on real gains.
- Retained gains: if no beneficiary is entitled, the trustee is taxed on the gain and loses the discount.
For the property angle specifically, see our property capital gains tax guide.
What asset protection does a family trust offer?
Because trust assets are held by the trustee rather than any individual, they generally sit outside a beneficiary’s personal estate, so they are usually shielded if a beneficiary faces personal creditors or bankruptcy. No beneficiary has a fixed entitlement to attack.
The protection is not absolute: it can be weakened by how the trust is controlled, personal guarantees, or clawback rules on transfers made before insolvency. It is a genuine benefit for business owners exposed to liability, but it is not a shield against every claim, and it works best when set up well before any trouble arises.
Family trust vs owning assets personally: which comes out ahead?
Against holding assets in your own name, a family trust trades simplicity for flexibility and protection. The comparison usually looks like this:
|
Factor |
Family trust |
Personal ownership |
|
Income distribution |
Split among beneficiaries each year |
All taxed to you at your rate |
|
CGT discount |
50% flows to individual beneficiaries (until 1 Jul 2027) |
50% applies to you directly (until 1 Jul 2027) |
|
Asset protection |
Generally shielded from personal creditors |
Exposed to your personal creditors |
|
Cost and admin |
Setup, annual accounting, resolutions |
Minimal |
|
Best for |
Families with income to split and assets to protect |
Simple situations, single earner |
When is a family trust not worth it?
A family trust only pays off when the tax and protection benefits outweigh its running costs, and for many people they do not. Skip it if:- There is no one to split income with: a single earner with no lower-rate family members gains little from the main benefit.
- Income is modest: the setup and annual accounting costs can exceed the tax saved on small amounts.
- You mainly want to retain profits: from 1 July 2028, the announced 30% minimum tax on discretionary trusts would tax retained trust income at 30% at the trustee level, narrowing the benefit for low-rate beneficiaries.
- You cannot commit to the compliance: trusts require timely resolutions and clean records every year, or the benefits fail.
TIPHow Sleek helps with family trusts
A family trust can genuinely reduce tax through income splitting, the 50% CGT discount, and asset protection, but every benefit carries a limit: minors are penalty-taxed, section 100A polices sham distributions, and two reforms will narrow the advantages: the legislated CGT change from 1 July 2027, and an announced (not-yet-law) minimum tax on discretionary trusts from 1 July 2028.
It works when you have real income to split and assets to protect, and it costs money and discipline to run.
Sleek advises whether a family trust suits your situation, establishes it with the right deed and trustee setup, and manages the annual distributions, resolutions, and records that keep the benefits intact. That ongoing discipline is what separates a compliant trust from one that fails under ATO scrutiny.
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Frequently Asked Questions
What are the main tax benefits of a family trust?
The three main benefits are income splitting (distributing income to family members on lower marginal rates), the 50% CGT discount on assets held over 12 months flowing through to individual beneficiaries, and asset protection. All rely on genuine, well-documented distributions, and the ATO applies anti-avoidance rules such as section 100A where arrangements are not real.
Can I distribute trust income to my children to save tax?
Only to a limited extent. Unearned income distributed to a beneficiary under 18 is taxed at penalty rates of up to 45% on amounts above roughly A$1,307, so distributing to young children does not deliver the saving people expect. Distributions to adult children on genuinely low incomes can work, provided they actually receive and benefit from the money.
Does a family trust get the 50% CGT discount?
Yes, for now. When a trust sells an asset held for more than 12 months, the 50% CGT discount can flow through to individual beneficiaries. Companies do not get it. The ATO has confirmed the discount still applies for Tax Time 2026, but from 1 July 2027 it is being replaced for individuals and trusts with cost-base indexation and a 30% minimum tax on gains.
Is using a family trust to reduce tax legal?
Yes, when done correctly. Income splitting and the CGT discount are legitimate features of trust taxation, not loopholes. What is not legal is a sham: distributing on paper to a low-rate beneficiary while someone else keeps the money. The ATO targets these under section 100A and can tax the trustee at the top marginal rate of 47%.
What is the 30% minimum tax on discretionary trusts?
It is an announced measure, from 1 July 2028 and not yet law, that would tax the income of a discretionary trust at a minimum 30% at the trustee level. Non-corporate beneficiaries would receive a non-refundable credit. It targets income splitting to low-rate beneficiaries, so it will narrow the main tax benefit of family trusts for those beneficiaries once in force.
How much does a family trust cost to run?
Beyond setup, a family trust needs annual accounting, a tax return, and properly documented distribution resolutions each year, which is an ongoing cost. For a household with genuine income to split and assets to protect, the tax saving usually justifies it. For a single earner or modest income, the running cost can exceed the benefit.
Family trust or owning assets personally, which is better?
It depends on your situation, but the rule of thumb is simple. If you have family members on lower rates to distribute to, or assets you want protected from personal creditors, a trust can come out ahead despite its cost. If you are a single earner with a simple setup, personal ownership is usually cheaper and easier. Model both before deciding.
