A trust is a legal relationship, not a company and not a person. A trustee holds legal title to assets, such as a business, property or shares, for the benefit of other people called beneficiaries, under the rules of a document called the trust deed. Australian business owners and families use trusts for asset protection, tax flexibility and succession planning, but the benefits come with a running cost: administration. Someone must run the trust within its rules, make the decisions the deed allows, keep proper records and deal with tax each year.
This article walks through how trust administration actually works, end to end: who does what inside a trust, what the annual calendar demands, where the legal risks sit, and when a lawyer is worth bringing in. Trusts come in several flavours, but the mechanics below apply to the most common small-business structures, discretionary family trusts and unit trusts, with the deed always the starting point.
Who does what inside a trust
A trust has a small cast of roles, and each one matters for administration. In a discretionary trust the trustee chooses each year which beneficiaries receive income. In a unit trust the beneficiaries hold units and are usually entitled to income and capital in proportion to their units. Hybrid trusts blend the two. Testamentary trusts are created by a will and take effect on the testator's death, often to protect assets for children or vulnerable beneficiaries, and can carry tax advantages such as more favourable rates on income for minors.
The roles themselves:
- Settlor: the person who creates the trust by executing the deed and providing the initial property, usually a nominal settling sum such as $10. Once the trust is running, the settlor typically has no further part in it.
- Trustee: holds the trust's assets and makes the day-to-day decisions. The trustee may be an individual or a company, and many business owners choose a corporate trustee for a cleaner separation between business assets and personal assets, and for easier succession when a director changes.
- Appointor: sometimes called the guardian or principal. The appointor usually holds the power to remove and appoint trustees. Whoever controls the appointor role in practice controls the trust, which is why appointor powers are often kept with a person outside the day-to-day management.
- Beneficiaries: the people or entities entitled to the trust's income or capital, either at the trustee's discretion or by fixed entitlement.
- The trust itself: not a separate legal entity. It cannot own property, sign contracts or sue in its own name; the trustee does all of that in its capacity as trustee, and the trust's tax affairs are handled through the trustee.
The deed sets the rules the trustee must follow
Every trust is created by a deed, executed by the settlor, with the settling sum handed to the trustee. The deed is the trust's constitution and it governs every decision the trustee makes. It defines the beneficiary class, the trustee's powers (to invest, borrow, distribute income and capital, add or exclude beneficiaries), any consent requirements such as an appointor's approval for particular decisions, and the vesting date on which the trust must wind up. Most modern deeds set a vesting date, commonly 80 years from creation, and may allow the trustee to extend it before that date arrives.
Administration begins and ends with reading the deed before acting. Borrowing against trust assets, making an in specie distribution (assets rather than cash), adding a beneficiary or changing the trustee are all steps that only work if the deed authorises them and the right formalities are followed, such as a deed of variation or a properly executed resolution. The deed can only be amended through its own amendment power or by court order.
The trustee should also keep a minute book that holds the deed, any variations, trustee resolutions, the asset register, loan and security documents and beneficiary records. Consistent, dated records are what turn a decision into something the trustee can prove later, to the ATO, a beneficiary or a court. Because trusts hold personal and financial information about beneficiaries, those records should be handled carefully and stored securely, especially where the trustee also runs a business.
The annual cycle: 30 June decides who pays the tax
The engine room of trust administration is the annual cycle, and the date everything turns on is 30 June. The steps that matter each year are:
- Present entitlement by resolution: the trust's income year runs from 1 July to 30 June. For income to be taxed to a beneficiary rather than to the trustee, the beneficiary must be presently entitled to it, and the usual way to create present entitlement is a trustee resolution made before the end of the income year. The ATO's trustee resolutions checklist is explicit: the resolution must be made by 30 June, or by any earlier date the deed itself requires, and the beneficiary's entitlement must be vested and indefeasible by that date. A resolution that allows the trustee to take the entitlement back later, or that only creates an entitlement on a future event, is not effective.
- If the resolution fails: where no beneficiary is presently entitled to income of the trust, s 99A of the Income Tax Assessment Act 1936 (Cth) taxes the trustee on that income at the special rate, in practice the top marginal rate of personal tax (currently 45% plus the Medicare levy) rather than the rates that would have applied in the beneficiaries' hands. This is the single most expensive failure in trust administration.
- Streaming: where the trust receives franked dividends or makes capital gains, trustees often want to stream those to particular beneficiaries to preserve franking credits or to match capital gains with losses. The ATO requires the specific entitlement to franked dividends to be recorded in writing by 30 June, and for capital gains by 31 August. A written record of the resolution is essential for streaming to work at all.
- After 30 June: the trustee lodges the trust's tax return, prepares distribution statements so beneficiaries can report their share, and files the year's minutes, resolutions and valuations in the minute book. The entitlement must exist by 30 June, but the actual payment to the beneficiary can happen later in the year.
- Reimbursement agreements: s 100A of the Income Tax Assessment Act 1936 (Cth) is a warning to trustees who try to have it both ways. Where a beneficiary's present entitlement arose out of a reimbursement agreement, the beneficiary is deemed never to have been presently entitled, and the trustee can be left with the tax on that income at the top rate. Arrangements that channel the income to one beneficiary while the economic benefit goes elsewhere are exactly what the section targets.
Day to day: the duties that bind every trustee
Beyond the calendar, the trustee carries a set of duties drawn from equity and statute. In NSW, the Trustee Act 1925 (NSW) is the main statute, and its provisions are a good proxy for the position across Australia, though every state has its own legislation. The core duties are:
- Follow the deed: the deed is the instruction manual. If it requires an appointor's consent before borrowing, or limits investment to certain classes of assets, the trustee must comply.
- Care and skill: under s 14A of the Trustee Act 1925 (NSW), a trustee investing trust funds must exercise the care, diligence and skill of a prudent person managing the affairs of others. A trustee whose profession is being a trustee or investing money for others is held to the higher standard of a prudent professional. The trustee must also review the trust's investments at least once each year.
- Best interests and impartiality: s 14B preserves the equitable duties: act in the best interests of all present and future beneficiaries, avoid speculative or hazardous investments, and act impartially between beneficiaries and between classes of beneficiaries. Where the deed grants a discretion to favour some beneficiaries over others, the deed controls, but the default is even-handedness.
- Take advice: the trustee is under a duty to take advice, and the reasonable cost of that advice is payable from trust funds. This is the statutory basis for spending trust money on lawyers and accountants when a decision warrants it.
- Keep proper accounts: accurate records protect both the beneficiaries and the trustee. If a decision is not recorded, it is hard to show later that it was made properly and within power.
- Act personally: trustees generally cannot delegate the exercise of their powers. In NSW, s 53 of the Trustee Act 1925 (NSW) allows a trustee to employ agents such as banks, lawyers and stockbrokers for administrative work, and the trustee is not responsible for the default of an agent employed in good faith, but the core discretionary decisions remain the trustee's.
Corporate trustees and director exposure
A company as trustee is attractive because the company, not the individuals, is the trustee. But the protection is not absolute. Under s 197 of the Corporations Act 2001 (Cth), a director of a corporate trustee is personally liable for a liability the company incurs as trustee if the company cannot discharge it and is not entitled to be fully indemnified from the trust assets, because of a breach of trust by the company, because it acted outside its powers as trustee, or because a term of the deed denies or limits the right of indemnity. Directors are not liable merely because the trust assets are insufficient; the exposure arises when the company loses its indemnity. That is why acting outside the deed, and a poorly drafted deed, are the real dangers with a corporate trustee.
When the trust changes: new trustees, varied deeds, vesting
Trusts are not static. Businesses grow, families change, and from time to time the trustee needs to be replaced or the deed updated.
Changing the trustee
Usually the deed gives the appointor the power to remove and appoint trustees, and the change is effected by a deed of retirement and appointment executed by the outgoing trustee, the new trustee and the appointor. Where no power exists, the court can appoint or remove a trustee in some circumstances. Changing the trustee can have tax and duty consequences, including capital gains tax on trust assets and state stamp duty, so trustees should check the position before acting rather than assume the change is neutral.
Varying the deed
Deeds commonly include an amendment power allowing the trustee, sometimes with the appointor's consent, to vary the deed by a further deed. Changes that affect beneficial interests, such as adding beneficiaries, are sometimes constrained by the amendment power, and variations can also carry tax and duty consequences.
Vesting and winding up
At the vesting date the trust ends and the trustee must distribute the trust fund to those entitled under the deed. If the trust has not vested and the deed allows it, the trustee may be able to extend the vesting date. Administering a trust past its vesting date, or letting it vest accidentally, is a common source of trouble.
Where trust administration typically goes wrong
The failure points in trust administration are remarkably consistent:
- Late or defective distribution resolutions: a resolution made after 30 June, one that appoints income to someone outside the beneficiary class, or one that leaves the entitlement defeasible, can mean the trustee is assessed under s 99A at the top rate.
- Variation of income resolutions: some trustees add clauses attempting to reallocate income if the ATO later adjusts the trust's income. The ATO warns that these resolutions create genuine doubt about who is presently entitled and often fail to achieve what the trustee intended, as discussed in its guidance and the case of Lewski v FCT [2017] FCAFC 145.
- Reimbursement agreements: arrangements that strip the economic benefit of a distribution away from the beneficiary can attract s 100A and unwind the distribution for tax purposes.
- Acting outside the deed: borrowing, investing or distributing without a power in the deed is a breach of trust, and with a corporate trustee it can strip the right of indemnity and expose directors personally under s 197 of the Corporations Act 2001 (Cth).
- Poor records: unrecorded resolutions, missing minutes and undated documents make disputes with beneficiaries and the ATO much harder to defend.
When to bring in a lawyer
Trust administration is mostly routine, but three situations reliably call for legal input:
- Before the trust is created: a deed drafted for the specific structure, state and tax position is cheaper than fixing a poorly drafted deed later. The deed's amendment power, vesting date and indemnity clause determine how much room the trustee has for decades.
- Before a significant decision: varying the deed, changing the trustee, borrowing, making in specie distributions and any decision with tax or duty consequences all benefit from a deed check first.
- When the trustee is unsure: where a decision is genuinely difficult, the Trustee Act 1925 (NSW) gives the trustee an exit ramp. s 63 lets a trustee apply to the Court for an opinion, advice or direction on the management or administration of the trust property or the interpretation of the trust instrument. A trustee who acts in accordance with the Court's direction is taken to have discharged the relevant duty, unless the advice was obtained by fraud or wilful concealment. Similar provisions exist in most other states. Judicial advice is not free, but for a genuinely contentious decision it converts personal exposure into court-sanctioned certainty.
A lawyer's role in the annual cycle is usually to work alongside the accountant: the accountant handles the numbers and the return, and the lawyer checks the deed, the resolution wording and the distribution mechanics before the 30 June deadline.
The 30 June resolution decides who pays the tax
If there is one moment where trust administration is won or lost, it is the distribution resolution made before 30 June. Everything else, the deed, the records, the duties, feeds into that decision, and the cost of getting it wrong is measured in top-rate tax on the trustee and possible personal exposure for the directors behind a corporate trustee.
The good news is that all of it is preventable. A trustee who reads the deed, keeps the minute book current and gets the resolution wording checked before the deadline is doing most of what administration requires. If you are a new trustee, or the deed has not been reviewed in years, an early conversation with a lawyer can identify the gaps while they are still cheap to fix. Trust administration questions, from checking a deed to drafting a resolution or a deed of variation, are a good fit for a free consultation with Artificer Legal.