Guide
Discretionary Trust for a Startup Founder Australia
When it's brilliant, when it's a mistake, and why the decision has to be made before incorporation.
Every Australian startup founder eventually gets the same advice from a friend: "You should hold your shares through a family trust." Sometimes it is brilliant advice; sometimes it is a $50,000 mistake at exit. The right answer depends on your personal situation — and, crucially, on getting the structure right before incorporation, not after.
What a Discretionary Trust Actually Is
A discretionary trust (often called a "family trust" when the beneficiaries are family members) is a structure where a trustee holds assets for the benefit of a defined class of beneficiaries. The trustee has discretion each year to distribute income and capital among those beneficiaries.
For a founder, this means:
- The trustee — usually a corporate trustee company — holds the founder's shares
- Dividends and capital gains flow to the trust, then to beneficiaries at the trustee's discretion
- The founder is typically a beneficiary (and often the appointor, controlling the trustee)
See our family trust guide and trust setup guide.
The Case For
1. Income Splitting
Dividends and capital gains can be distributed to lower-income beneficiaries (a spouse on parental leave, adult children at university) at their marginal rates. On a $500,000 dividend, the difference between distributing to a 47% marginal earner vs a 19% marginal earner is $140,000 in tax.
2. Asset Protection
Shares held in trust are not (generally) exposed to the founder's personal creditors. If the founder is sued personally — a bad guarantee, a car accident, a director duty claim in another company — the shares are ring-fenced.
3. Estate Planning Flexibility
Trust assets don't form part of the founder's estate. Succession is controlled by the trust deed and the appointor mechanism, not by a will — which can matter for blended families or contested estates.
4. CGT Discount Still Available
Trusts get the 50% CGT discount on shares held more than 12 months. Companies do not. This alone makes trusts materially more tax-efficient than a bucket company on exit.
The Case Against
1. Set-Up and Ongoing Cost
Deed drafting + corporate trustee: $1,500–$3,000. Annual accounting and trust tax return: $1,500–$3,000. For a founder still earning modest income, that is real overhead.
2. The 80-Year Vesting Rule
Trusts in most Australian states (except SA) must vest within 80 years. For a founder who wants a multi-generational holding, this is a limit — though for most startups exiting within 10 years, it never comes up.
3. Losses Trapped in Trust
If the startup fails and the shares become worthless, the capital loss stays in the trust — it can only offset future capital gains inside the trust. Held personally, the founder could use the loss against their own future gains.
4. ESIC and Sophisticated Investor Tests
If you plan to raise capital under the ESIC rules, both the company and the investors must qualify. A trust investing is fine, but the sophisticated investor test is applied at trust level — not at beneficiary level.
5. It's Hard to Reverse
Moving shares out of a trust later triggers CGT at market value. Move them in later and the same applies. The structure has to be set at day one.
When It Usually Makes Sense
- Founder is high-income (their day job or the startup itself pays well)
- Founder has a spouse or family members on lower marginal rates
- Founder is realistically anticipating a material exit (Series A+ trajectory)
- Founder has personal risk exposure (guarantees, other director roles)
When It Usually Doesn't
- Solo founder, no family, low personal income
- Pre-revenue, uncertain the company will survive year one
- Founder is going to be a full-time employee of the startup and take low salary + shares
- Startup is a lifestyle business without an exit trajectory
Structure Options
| Structure | Best for | Watch out for |
|---|---|---|
| Shares held personally | Solo, low-income, uncertain outcome | No income splitting, no asset protection |
| Discretionary trust | High income + family + likely exit | Cost, complexity, losses trapped |
| Bucket company under trust | Retaining profits at 25% rate | Loses 50% CGT discount |
| SMSF (small portion) | Sophisticated founders w/ existing SMSF | Sole purpose test, in-house asset rules |
Get the Structure Right Before You Incorporate
The single most important message: decide before the company exists. Once shares are issued to you personally, moving them into a trust is a CGT event calculated at market value — which, if you have raised any capital, means real tax on paper gains.
Frequently Asked Questions
Can I hold my founder shares through a family trust?
Yes, and many founders do — the shares are held by the trustee (usually a corporate trustee) on behalf of the trust's beneficiaries. But the decision has to be made before or at incorporation; moving shares into a trust later triggers CGT.
Does holding shares through a trust break ESIC concessions?
Not necessarily. Under the ESIC rules, the investor (the trust) must meet the sophisticated investor test or fall within the $50k retail cap. The tax offset flows to the trust and can be distributed to beneficiaries. But the CGT exemption on qualifying shares is fully available.
What are the downsides?
Extra setup cost ($1,500–$3,000), annual accounting ($1,500–$3,000), the 80-year vesting rule (in most states), and complexity if you ever want to distribute shares in specie. Trusts also can't access the CGT 50% discount on assets held less than 12 months.
Is a family trust better than owning shares personally?
It depends on your income, family situation, and asset protection needs. High-income founders with a spouse and children usually benefit; single low-income founders often don't. This is a call for your accountant and lawyer, not a template answer.
Next Step
See our Startup Legals service page or book a 15-minute discovery call to talk through your holding structure before you incorporate.
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