Family partnership trusts are increasingly used by Australian families to manage business assets, reduce tax liability, and implement intergenerational succession plans. They are especially useful when two or more family members operate a business or manage shared investments. This guide explains how these trusts work in Australia, their key legal requirements, tax implications, and strategic benefits.
What Is a Family Partnership Trust?
A family partnership trust is a legal structure that combines features of a partnership and a discretionary trust. Typically, family members act as partners in a business venture, but instead of receiving profits directly, their shares are held on trust. The trustee distributes income and assets at their discretion, in accordance with the trust deed.
This hybrid structure allows families to:
- Run businesses jointly with shared decision-making,
- Distribute profits in a tax-effective way,
- Provide for future generations through controlled succession,
- Protect assets from individual liabilities.
Legal Framework in Australia
Family partnership trusts in Australia operate under a combination of legal regimes:
- The Trusts Act of each State or Territory governs trust formation, duties of trustees, and trust administration.
- The Partnership Act defines the nature of partnership agreements between individuals.
- The Corporations Act 2001 (Cth) may also apply where corporate trustees are used.
- The Australian Taxation Office (ATO) recognises this structure for tax purposes, treating the trust as a separate entity from its beneficiaries.
Legal advice is essential when drafting the trust deed and partnership agreement, as these instruments define how the trust operates and how partners interact.
Key Benefits of a Family Partnership Trust
Before establishing this structure, families often seek clarity on its advantages. Common legal and strategic benefits include:
- Income Splitting: Trustees can distribute income across beneficiaries in a way that minimises overall tax liability.
- Asset Protection: Assets held in trust are generally protected from individual bankruptcy or marital breakdown of a partner.
- Succession Planning: The structure allows families to retain control over how assets are passed to future generations.
- Operational Control: Shared management allows for collaboration while maintaining centralised decision-making via trustees.
- Capital Gains Tax Deferral: Certain capital gains may be deferred or reduced via careful trust management.
Example: A Brisbane family operating a medical practice used a family partnership trust to separate ownership from day-to-day operations. This helped them distribute income among children in lower tax brackets, while shielding business assets from the liabilities of a partner involved in a different legal dispute.
Establishing a Family Partnership Trust
To set up a family partnership trust, the following legal steps are involved:
- Appoint Trustee(s) – Either individuals or a corporate entity can act as trustee.
- Draft the Trust Deed – Outlines the trust’s powers, beneficiary classes, and distribution rules.
- Prepare a Partnership Agreement – Sets out obligations, profit sharing, and dispute resolution mechanisms.
- Apply for an ABN and TFN – Required to register with the ATO and lodge trust returns.
- Open a Trust Bank Account – All transactions must flow through this account.
- Stamping (where applicable) – Some states require trust deeds to be stamped.
All documents must comply with the relevant state legislation and reflect the specific roles of family members.
Tax Considerations
The ATO treats a family partnership trust as a taxable trust entity, requiring annual returns. Key tax considerations include:
- Distributable Income: Trustees must determine how much income is available for distribution and allocate it before the end of the financial year.
- Franking Credits: Beneficiaries may be entitled to franking credits based on income distribution from dividend-paying shares.
- Capital Gains Tax (CGT): Proper structuring can help defer or minimise CGT on disposal of trust assets.
- Trust Loss Rules: Losses cannot be distributed to beneficiaries and are retained within the trust.
ATO Taxation Ruling TR 2006/4 and Div 6 of the Income Tax Assessment Act 1936 (Cth) govern these processes.
Potential Risks and Legal Pitfalls
While family partnership trusts offer flexibility, legal risks must be addressed:
- Unclear Trust Deed: Ambiguity can lead to disputes or ATO challenges.
- Breach of Trustee Duties: Trustees owe fiduciary obligations. Mismanagement can lead to legal action.
- Beneficiary Conflict: Family disagreements may escalate without clear succession or exit clauses.
- Tax Avoidance Risk: The ATO scrutinises income splitting arrangements under anti-avoidance rules (e.g., Part IVA).
Use Cases: When a Family Partnership Trust Works Best
Before deciding whether to establish a family partnership trust, it is important to understand the practical contexts in which this structure delivers the most legal and strategic value. While not suitable for every family or enterprise, it proves particularly effective in the following scenarios:
- Family-Owned SMEs: Especially those planning multi-generational involvement.
- Agribusiness: Where land and operations are passed through the family line.
- Professional Services: Law, accounting, or medical practices with shared ownership.
- Passive Investment Structures: Holding real estate or shares with flexible income distribution.
FAQs: Family Partnership Trusts in Australia
Before entering this structure, many families seek legal clarity on common concerns:
What are the legal requirements for a family partnership trust?
Establishing one requires a valid trust deed, clearly appointed trustees, identifiable beneficiaries, and compliance with state trust laws and partnership statutes.
Can a family partnership trust protect assets from creditors?
Yes — to a degree. Assets held in trust are typically not exposed to personal creditors of individual beneficiaries or partners, provided the trust is not a sham and was not created to intentionally defeat creditors.
How long does it take to set up?
With legal and tax advisors, most structures can be legally established within 1–2 weeks, including deed execution, ATO registration, and partnership agreement finalisation.
Are there downsides to this structure?
Risks include tax complexity, trustee liabilities, and potential family disputes. It’s not suitable for all families, particularly where control, trust, or governance are issues.
What happens when a trustee dies or resigns?
The trust deed should include procedures for successor trustees. If not, state law or court orders may be required to appoint a new trustee.
Final Thoughts
A family partnership trust can be an effective legal instrument for Australian families seeking to manage business assets, reduce tax burdens, and ensure generational continuity. However, expert legal advice is essential to ensure the trust is compliant, tax-effective, and aligned with family objectives.
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