Thinking about using a trust to run your business or hold your assets? A trust can be a smart move for small business owners in Australia - but only if it’s set up properly.
At the heart of every trust is a legal document called a trust deed. It sets the rules of the game: who controls the trust, who can benefit, and how decisions get made. If your trust deed is unclear or incorrect, you can face tax issues, disputes, or even an invalid trust.
In this guide, we’ll unpack what a trust deed is, how it works in Australia, the clauses that matter, and practical steps to get your trust set up the right way from day one.
What Is A Trust Deed (And Why Do Businesses Use Trusts)?
A trust deed is a formal legal document that creates a trust and governs how it operates. It’s executed as a deed - not a simple contract - which means stricter signing and witnessing rules apply.
In business, trusts are often used to:
- Hold and protect assets (e.g. IP, equipment, or a property used by the business).
- Distribute profits to beneficiaries in a tax-efficient way (subject to tax advice).
- Own shares in a company through a family or unit trust structure.
- Separate trading risk from valuable assets via a holding trust and a trading company.
Unlike a company, a trust is not a separate legal entity - it’s a relationship. The trustee (an individual or a company) legally owns the trust property and must deal with it for the benefit of the beneficiaries, according to the deed.
Trust Deed Meaning: Key Roles And Types Of Trusts
Before you draft anything, it’s important to understand who’s involved and which trust structure suits your goals.
Core Roles Defined
- Trustee: The legal owner of trust property, responsible for managing the trust per the deed and law. Many businesses appoint a company as trustee for limited liability and continuity.
- Beneficiaries: The people or entities who can receive distributions (income or capital) from the trust. In discretionary trusts, the trustee can decide who gets what.
- Appointor/Principal: Often the most powerful role; this person (or entity) can remove and appoint the trustee. Control often sits here in practice.
- Settlor: The independent person who establishes the trust by giving the initial settlement sum. The settlor should not be a beneficiary and generally should have no ongoing role.
Common Trust Structures For Small Businesses
- Discretionary (Family) Trust: The trustee has discretion about which beneficiaries receive distributions and how much. Widely used for family businesses and asset protection.
- Unit Trust: Beneficiaries hold fixed “units” similar to shareholdings. Good where unrelated business partners need clear, fixed entitlements.
- Hybrid Trust: Combines elements of both (discretionary distributions with unit-based interests). Can be complex - ensure tailored advice.
- Testamentary Trust: Created by a will (less relevant for business setup, but sometimes used for succession planning).
Choosing the right structure is a strategic decision involving control, risk, tax and succession. A conversation with your accountant and lawyer early on is well worth it.
What Should A Trust Deed Include?
Every trust deed is different, but solid deeds cover the following areas clearly and in plain English.
1) Parties And Definitions
Identify the trustee, the appointor/principal, the beneficiaries (or classes of beneficiaries), and the settlor. Define key terms upfront to avoid confusion later.
2) Trust Purpose And Property
Describe the purpose (e.g. holding business assets, receiving business profits) and initial trust property (often a nominal settlement sum). Allow the trustee to accept further property into the trust.
3) Trustee Powers And Duties
Give the trustee broad but clear powers to invest, borrow, grant security, run a business, employ advisers, and distribute income/capital. Balance this with duties to act in good faith, keep records, and comply with the deed.
4) Distributions: Income And Capital
Explain how and when the trustee can make distributions. Discretionary deeds usually allow flexibility each financial year; unit trusts specify distributions according to unit holdings.
5) Appointor/Principal Powers
Set out how the appointor can remove or appoint the trustee, and how the appointor role passes on (e.g. if the appointor dies or resigns). This is critical for long-term control.
6) Adding/Excluding Beneficiaries
For discretionary trusts, include mechanisms to add eligible beneficiaries or exclude individuals (e.g. to manage risk). Carefully define beneficiary classes from the outset.
7) Vesting Date
Trusts must end (vest) at some point. Set a vesting (or “termination”) date within legal limits, and say what happens to the trust property at that time.
8) Meetings, Records And Decisions
Outline how trustee decisions are made (resolutions, minutes), whether multiple trustees must act unanimously, and how records are kept.
9) Indemnity And Limitation Of Liability
Protect the trustee (acting properly) with an indemnity out of trust assets. If using a corporate trustee, the company’s Company Constitution should align with how the trust is governed.
10) Variation Power
Allow amendments by deed to keep the trust current. Variation clauses must be drafted carefully to avoid tax or “resettlement” risks.
11) Successor Planning
Plan for succession - how the appointor role passes, how a new trustee is appointed, and what happens if beneficiaries change.
How To Set Up A Trust Deed In Australia (Step-By-Step)
If you’re ready to move forward, here’s the typical process for getting a trust up and running.
Step 1: Choose Your Structure And Controller
Decide whether a discretionary trust, unit trust or hybrid trust suits your needs. Confirm who will be trustee (individuals or a company) and who will be the appointor/principal. Many businesses use a company as trustee to help limit personal risk.
Step 2: Draft A Tailored Trust Deed
Work with a legal expert to draft a deed that reflects your goals, industry, and family/ownership situation. Off-the-shelf deeds rarely cover real-world complexities like funding, IP ownership, or partner exits.
Step 3: Execute The Deed Correctly
A trust deed must be signed as a deed, which has stricter formalities. Check if the deed requires witnesses, how many, and whether execution must be in wet ink signatures. If your trustee is a company, you’ll generally execute under section 127 of the Corporations Act with the appropriate officeholders.
Keep the original deed safe. Certified copies are useful for banks, accountants and advisers.
Step 4: Settle The Trust
An independent settlor provides a nominal settlement sum (often $10) to the trustee - this is the moment the trust is created. The settlor shouldn’t be a beneficiary and generally has no ongoing role.
Step 5: Register For Tax And Business Details
Apply for the trust’s TFN and, if required, an ABN and GST. The trustee will also need to set up a bank account in the trust’s name. For a quick overview of TFN, ABN and related basics, see how trust requirements work in Australia.
Step 6: Put The Right Agreements Around The Trust
If the trust will own shares in a trading company, think about how that interacts with your cap table and governance. Many founders use a trust for holding shares through a trust, alongside a Shareholders Agreement at the company level to manage decision‑making and exits.
Step 7: Maintain Records And Make Distributions Properly
Minute trustee resolutions, keep accounting records, and make distribution decisions in line with the deed (especially at year end). Poor paperwork can cause tax and compliance headaches.
Trust Deed Vs Deed Of Trust: Is There A Difference In Australia?
In some countries, “deed of trust” is a security instrument used in property lending (more like a mortgage). In Australia, small businesses typically use “trust deed” to describe the document that sets up and governs a trust relationship.
If you’ve seen “deed of trust” in Australian context, it’s often just another way of saying trust deed - but always check the document carefully to confirm its purpose.
Corporate Trustee Or Individual Trustee?
One of the most important setup choices is whether your trustee is an individual or a company.
When A Corporate Trustee Makes Sense
- Liability: A company can help ring‑fence risk so personal assets aren’t directly exposed to trust liabilities.
- Continuity: It’s easier to change directors or shareholders than to replace an individual trustee in some scenarios.
- Administration: Banks and counterparties often prefer dealing with a company as trustee.
If you go this route, make sure your company structure and documents (like your Company Constitution) support how you intend to run the trust.
When Individual Trustees Might Be Enough
- Simple setups: A family trust with limited activities and low risk might use individuals as trustees.
- Cost: Fewer upfront fees than setting up and maintaining a company (but weigh this against risk).
Remember: regardless of who the trustee is, they must follow the deed and act in the beneficiaries’ best interests.
Varying Or Replacing A Trust Deed
Businesses evolve - and your deed should keep pace. You can usually update a trust deed using a deed of variation, provided the original deed allows it and you follow the specified process.
Common updates include changing trustee or appointor arrangements, adding or redefining beneficiaries, or modernising distribution powers and administrative clauses.
Two big watch‑outs:
- Tax and resettlement risk: Some changes can be so significant they’re treated as creating a new trust, with potential tax and duty consequences.
- Execution formalities: A variation is still a deed - follow signature, witnessing and, where relevant, company execution rules (including wet ink signatures or electronic rules, and section 127 for companies).
If the original deed is lost, you may need a deed of confirmation or court directions. The earlier you get advice, the easier it is to manage.
Using A Trust Deed In Day-To-Day Business
Once your trust is established, it becomes part of your operating framework. Here’s how it typically shows up in practice.
1) Banking And Finance
Banks will request the deed (and any variations) to open accounts or provide finance. They check trustee powers, the appointor, and the identity of beneficiaries as part of their onboarding and risk processes.
2) Contracts
When you enter contracts, sign as “ABC Pty Ltd as trustee for XYZ Trust” (or similar). This clarifies that the trustee is contracting in its trustee capacity. Make sure your internal approvals (trustee resolutions) support the transaction.
3) Distributions And Year-End
For discretionary trusts, trustees usually pass resolutions by 30 June to distribute income for tax purposes. Keep minutes and follow the deed - if you miss deadlines or distribute in a way the deed doesn’t allow, you can face avoidable taxes and disputes.
4) Ownership And IP
Decide which assets the trust will hold: business names, trade marks, domain names, equipment or property. Holding core IP at the trust level can help with asset protection and flexibility if ownership changes later.
5) Governance And Succession
Review the appointor provisions and any successor clauses. If something happens to you or a co‑founder, you want a clean pathway for who controls the trustee and the trust going forward.
Common Pitfalls To Avoid
- Using a generic deed: Off‑the‑shelf documents rarely match your actual business needs, and gaps are costly later.
- Confusing roles: If the appointor, trustee and beneficiaries aren’t clearly defined, control and tax positions can become messy.
- Ignoring execution rules: Deeds have stricter signing requirements than contracts - get the formalities right from day one.
- No variation power: If the deed can’t be updated, you may be stuck with outdated rules.
- Poor record‑keeping: Missing trustee resolutions or distribution minutes can lead to ATO issues and disputes among beneficiaries.
FAQs About Trust Deeds For Small Businesses
Is a trust deed the same as a company constitution?
No. A trust deed governs a trust relationship. A company constitution governs how a company operates. If you use a company as trustee, both documents will be relevant and should work together.
Can a trust own a company?
Yes. Many founders hold their shares in a trading company via a family or unit trust. If you’re holding shares through a trust, ensure your cap table, Shareholders Agreement and trust deed align.
Do I need to register the trust deed?
Trusts aren’t “registered” like companies, but you’ll need a TFN for the trust and possibly an ABN and GST. Learn the practical steps for TFN and ABN under trust requirements in Australia.
Can I sign the deed electronically?
It depends on your jurisdiction and the circumstances. Some deeds still require wet ink signatures. Company execution under section 127 may support electronic signing in certain cases - always check before signing.
What happens if we want to change trustee?
Follow the deed’s process for appointing and removing the trustee, and document the change via a deed. Notify banks, the ATO and other stakeholders, and update your records accordingly.
Key Takeaways
- A trust deed is the rulebook for your trust - it creates the trust and controls how it operates, so it needs to be clear and tailored.
- Choose the right structure (discretionary, unit or hybrid) and set control points carefully across the trustee and appointor roles.
- Draft key clauses around trustee powers, distributions, appointor powers, variation and succession; avoid generic, one‑size‑fits‑all templates.
- Execute the deed properly as a deed, and follow correct signing rules, including any requirements for wet ink signatures or company execution under section 127.
- Get the trust’s TFN (and ABN/GST if required), maintain good records and make distributions in line with the deed and the financial year timeline.
- Plan for the future: include a workable variation power, successor arrangements, and make sure your trust deed aligns with related documents like your Company Constitution if you use a corporate trustee.
If you’d like a consultation about drafting or reviewing a trust deed for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
