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    TaxKiln Australia
    TaxKilnAustralia tax guidance

    Trust Structures for SMEs

    How discretionary, unit, and hybrid trusts work for Australian small businesses, income distribution mechanics under Division 6, the s 100A reimbursement agreement risk, bucket company strategies, family trust elections, and the 30% minimum trust tax arriving from 1 July 2028.

    Discretionary trusts remain the dominant SME structure in Australia for 2025-26, providing income distribution flexibility, asset protection, and CGT discount flow-through. Under Division 6 of ITAA 1936, trust net income is assessed to beneficiaries at their marginal rates when the trustee resolves a distribution by 30 June. From 1 July 2028, a 30% minimum tax at the trustee level on discretionary trust distributions fundamentally changes the arithmetic, with a restructuring window (CGT roll-over relief) running from 1 July 2027 to 30 June 2030.

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    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact ATO. Read our editorial scope →

    Why trusts remain common in Australian business

    Despite looming reforms, discretionary trusts dominate SME structures for five reasons. Income distribution flexibility allows trustees to allocate profits annually to beneficiaries on low or nil income, maximising tax efficiency until 30 June 2028. Trust assets are legally separated from beneficiaries' personal estates, providing asset protection against creditors. Capital gains realised by trusts flow through to individual beneficiaries who apply the 50% CGT discount at their own level. Each discretionary trust holds a separate land tax-free threshold in most states (NSW, Victoria, Queensland). Trustee changes occur without triggering CGT disposal events, supporting succession planning.

    Types of trusts in business

    Five trust structures are used in Australian business, each with different characteristics.

    Trust taxation mechanics (current through 30 June 2028)

    Trust taxation operates as a flow-through system. The trust itself is not a taxable entity on income distributed to beneficiaries. Division 6 of ITAA 1936 assesses net income proportionately to presently entitled beneficiaries under s 97. Each beneficiary includes their proportionate share in their personal return, taxed at their marginal rate. Income not distributed by 30 June is assessed to the trustee under s 99A at 47% (45% plus 2% Medicare Levy). Trustee resolutions must be made by 30 June each year. Resolutions after year-end are invalid for tax purposes and the ATO strictly enforces this timing.

    Section 100A: reimbursement agreements

    Section 100A of ITAA 1936 targets arrangements where income is distributed to a low-tax beneficiary but the real economic benefit flows elsewhere. Four requirements must be met: the present entitlement arose from or in connection with an agreement; the agreement provides for payment, property transfer, services, or other benefits to a person other than the entitled beneficiary; one or more parties had a purpose (not necessarily dominant) of reducing tax; and the ordinary family or commercial dealing exception is not satisfied.

    ATO risk zones (TR 2022/4 and PCG 2022/2)

    Green zone (low risk): distributions to adult children with no reimbursement or benefit back to parents; distributions to spouses in intact relationships where funds are commingled for family expenses. Amber zone (some risk): distributions to adult children who then gift or loan funds to parents on non-commercial terms; unpaid present entitlements held informally without sub-trust documentation. Red zone (high risk): circular fund flows where cash returns to the trust or related entity within a short period; distributions to low-income beneficiaries who immediately lend funds back interest-free to high-income family members; corporate beneficiary arrangements where dividends are never paid but funds are lent back under Division 7A loan agreements.

    The bucket company strategy

    A bucket company receives trust distributions above the amounts allocated to individuals using their lower tax brackets. The company pays 25% (BRE rate) or 30% on the distribution and retains the after-tax amount for reinvestment or later extraction as franked dividends.

    Worked example (current rules)

    Anh in Sydney runs a trading trust generating $500,000 profit. She distributes $180,000 to individuals (utilising lower brackets) and $320,000 to the bucket company. The company pays $80,000 in tax (25% BRE rate) and retains $240,000 for reinvestment or later franked distribution. Total current-year tax on the company slice: $80,000, compared with up to $150,400 if that $320,000 were assessed to an individual on the top marginal rate.

    Division 7A trap

    If the bucket company lends money back to the trust or individual shareholders without a compliant Division 7A loan agreement, a deemed dividend arises taxed at the shareholder's marginal rate with no franking credits. Complying loans require a written agreement, minimum interest at the ATO benchmark rate (8.37% for 2025-26), maximum 7-year term (unsecured) or 25 years (secured over real property), and annual minimum repayments.

    Family Trust Election (FTE)

    An FTE under Schedule 2F of ITAA 1936 is an optional election where the trustee specifies a test individual whose family group defines who can receive distributions without triggering penalty tax. Benefits include simplified access to trust loss provisions (only the income injection test applies), company loss tracing concessions, franking credit access under holding period rules, exclusion from Trustee Beneficiary Reporting rules, and small business restructure roll-over eligibility. The cost is Family Trust Distribution Tax (FTDT) at 47% on any distributions outside the family group, assessed to the trustee and due 21 days after distribution.

    Family group inclusions

    The family group includes the test individual, their spouse, parents, grandparents, siblings, children, nephews, nieces, lineal descendants, spouses of all the above, other family trusts with the same test individual, entities that have made Interposed Entity Elections referencing the test individual, entities where family members hold 100% fixed entitlements, deductible gift recipients, and tax-exempt bodies.

    When to make (and when not to make) an FTE

    Make an FTE when the trust has tax losses and cannot satisfy the pattern of distributions test, when the trust is a beneficiary of another trust and Trustee Beneficiary Reporting rules would apply, or when a small business restructure is planned. Do not make an FTE if the family group is likely to expand beyond lineal descendants, succession planning involves non-family partners or key employees receiving equity, or the group has multiple trusts with different controlling family members (FTDT risk compounds).

    Preparing for the 2028 reforms

    From 1 July 2028, trustees of discretionary trusts will pay a minimum 30% tax on all income distributed to beneficiaries. Individual beneficiaries receive non-refundable tax credits. There is no grandfathering. The reform is estimated to raise $4.5 billion over five years. A CGT roll-over relief window runs from 1 July 2027 to 30 June 2030.

    Key statute references

    The legislative framework for trust taxation spans both the 1936 and 1997 Income Tax Assessment Acts.

    Statute references

    • ITAA 1936 Division 6 (ss 95-102)
    • ITAA 1936 s 100A (Reimbursement agreements)
    • ITAA 1936 Schedule 2F (FTDT, FTE, IEE)
    • ITAA 1997 Division 270 (Trust losses)
    • ITAA 1997 Subdivision 115-C (Streaming of capital gains)
    • ATO TR 2022/4 and PCG 2022/2 (s 100A interpretation and compliance)
    • Aussiegolfa Pty Ltd v Federal Commissioner of Taxation [2018] FCAFC 122 — where an SMSF invests in a related-party unit trust, the in-house asset rules and the sole purpose test remain the binding constraints; a single-asset acquisition can be compliant if structured correctly.
    • Bywater Investments Ltd v Federal Commissioner of Taxation [2016] HCA 45 — central-management-and-control test for trustee company residency where the trustee is a corporate.
    • CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 — engaging workers through a trading trust: contractor vs employee turns on the written contract.

    Frequently asked questions

    What is s 100A and when does the ATO apply it?+
    Section 100A of ITAA 1936 is an anti-avoidance rule targeting arrangements where income is distributed to a low-tax beneficiary but the real economic benefit flows to someone else. It requires four elements: the present entitlement arose from or in connection with an agreement, the agreement provides benefits to a different person, one or more parties had a tax reduction purpose, and the ordinary family or commercial dealing exception is not satisfied. The ATO's practical compliance guideline PCG 2022/2 classifies arrangements into green (low risk), amber (some risk), and red (high risk) zones.
    How does the bucket company strategy work, and does Division 7A apply?+
    A bucket company receives trust distributions above the amounts allocated to individual beneficiaries using their lower tax brackets. The company pays 25% (BRE) or 30% on the distribution and can retain the after-tax amount for reinvestment or later extraction as franked dividends. However, if the company does not physically receive the cash and instead the trust retains it (or loans it back), Division 7A can treat the unpaid present entitlement as a deemed dividend. Post-2028, the 30% minimum trust tax makes this strategy unviable because distributions to companies are taxed at 30% at trustee level with no credit available to the company, then again at the company rate.
    What is a Family Trust Election and should I make one?+
    A Family Trust Election under Schedule 2F of ITAA 1936 nominates a test individual whose family group defines eligible distribution recipients. Benefits include simplified access to trust loss provisions (only the income injection test applies), company loss tracing concessions, and small business restructure roll-over eligibility. The cost is Family Trust Distribution Tax at 47% on any distributions outside the family group. An FTE is worth considering when the trust has tax losses and cannot satisfy the pattern of distributions test, or when small business restructuring is planned. It is not suitable where family group boundaries are likely to expand to include non-lineal parties.
    Should I restructure my trust before the 2028 reforms?+
    The answer depends on your beneficiary profile and asset types. If most beneficiaries are on marginal rates of 37% or higher, the 30% minimum tax is still lower than their rate, and the asset protection and succession benefits of a trust may outweigh the cost. If you distribute heavily to low-income family members or to a bucket company, the reform destroys those strategies. The CGT roll-over relief window (1 July 2027 to 30 June 2030) allows restructuring into a company or unit trust, but stamp duty in land-rich states (Victoria, NSW, Queensland) and loss of the 50% CGT discount must be weighed.

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