Flow-Through Entities in Australia: 2025 Guide for Investors

Flow-through entities are becoming an increasingly popular investment vehicle among Australians seeking tax efficiency and flexible structures. As government policy and economic trends evolve in 2025, understanding how these entities work—and how they’re being shaped by new regulations—can give you a significant edge as an investor or business owner.

What Are Flow-Through Entities?

A flow-through entity is a business structure where income, deductions, and credits ‘flow through’ directly to the owners or investors, rather than being taxed at the company level. In Australia, common flow-through structures include partnerships, some trusts (like discretionary trusts), and certain managed investment schemes. Unlike traditional companies, these entities themselves typically do not pay income tax; instead, profits are distributed and taxed at the individual recipient’s marginal tax rate.

• Examples: Family trusts distributing rental income, managed investment funds passing capital gains to unit holders, or professional partnerships sharing business profits among partners.

• Tax Impact: Investors and beneficiaries declare their share of income in their personal tax returns, potentially taking advantage of lower individual tax rates or tax offsets.

2025 Policy Updates: What’s Changing?

The Australian Taxation Office (ATO) and Treasury have introduced several updates in 2025 to improve transparency and prevent tax avoidance through flow-through structures. Here are the key highlights affecting investors and business owners:

• New Reporting Standards: All flow-through entities are now required to provide detailed annual reports on income allocation, beneficiary details, and distributions. This is part of a broader push to close loopholes and ensure beneficiaries are meeting their tax obligations.

• Crackdown on ‘Alienation of Income’: The ATO is increasing scrutiny on trust arrangements that attempt to divert income to beneficiaries in lower tax brackets (such as adult children or non-resident relatives). Expect more audits and greater enforcement.

• Capital Gains Treatment: There is now clearer guidance on how capital gains from flow-through entities should be reported by individual investors, with penalties for misreporting or delayed disclosures.

• Managed Investment Schemes: Certain schemes must now provide real-time income statements to unit holders, streamlining tax time and reducing administrative delays.

For example, if you’re a beneficiary of a family trust holding commercial property, you’ll now receive a standardized income statement each year, making it easier to complete your tax return and ensuring the ATO has a matching record.

Why Choose a Flow-Through Entity?

Flow-through entities can offer significant advantages, but they’re not for everyone. Here’s why they’re so popular among savvy Australian investors in 2025:

• Tax Efficiency: By allocating income to individuals in lower tax brackets, families can often reduce their collective tax bill—provided they comply with new anti-avoidance rules.

• Asset Protection: Trusts and partnerships can help protect assets from creditors or business risks, especially when structured with professional advice.

• Investment Flexibility: Managed investment funds allow for pooling resources and sharing returns, while family trusts can support intergenerational wealth transfer.

• Succession Planning: With the right trust deed or partnership agreement, it’s easier to pass on assets or business control to the next generation.

However, there are also challenges. Flow-through structures can be complex to set up and manage, and compliance costs may rise under the new 2025 reporting requirements. Getting the structure right from the start—and keeping meticulous records—has never been more important.

Real-World Example: Flow-Through Entities in Action

Consider a group of siblings who inherit a portfolio of rental properties. Instead of each holding property individually, they set up a discretionary family trust. The trust collects rental income, pays expenses, and then distributes profits to the siblings based on need and tax efficiency each year. With the 2025 ATO changes, they now receive detailed annual statements for their personal tax returns and must ensure income allocations reflect genuine distributions—no more paper beneficiaries or ‘round robin’ arrangements.

Similarly, a managed investment scheme might pool funds from hundreds of investors to buy commercial real estate. Each unit holder receives a proportional share of the income and capital gains, reported directly to them and the ATO, reducing the risk of double taxation.

Key Takeaways for 2025 and Beyond

• Flow-through entities remain a powerful tool for tax efficiency, investment flexibility, and asset protection.

• New 2025 policies mean greater transparency and reporting obligations—compliance is now front and centre.

• Work with professionals to ensure your structure and reporting meet the latest requirements, especially if your circumstances or the tax law changes.