Rabbi Trusts in Australia: 2025 Guide for Executive Compensation

In 2025, Australian firms are exploring new ways to attract and retain top executive talent. One increasingly popular strategy imported from the US is the Rabbi Trust—a unique vehicle for deferred compensation. While not yet mainstream down under, interest is growing as businesses seek to balance incentive, retention, and tax efficiency in a rapidly evolving regulatory environment.

What is a Rabbi Trust?

A Rabbi Trust is a form of trust arrangement originally developed in the United States, designed to hold deferred compensation for executives. The name comes from the first IRS ruling on the concept, which involved a rabbi. The key idea: employers promise to pay certain benefits in the future, with assets set aside in a trust to provide security to the executive, but not so secure as to trigger immediate taxation or run afoul of corporate insolvency laws.

• Deferred Compensation: Funds or benefits are set aside for future payout, often as part of an executive’s long-term incentive plan.

• Creditor Access: In the event of company insolvency, assets in the trust remain available to general creditors, preventing executives from gaining unfair priority.

• Tax Timing: Executives are not taxed on the assets until they actually receive payments, a significant advantage over direct bonuses or shares.

Australian Context: Adoption and Regulatory Landscape in 2025

While Rabbi Trusts are firmly established in the US, their adoption in Australia is still novel. However, 2025 has seen a spike in interest, particularly among multinational companies and fintech startups aiming to emulate US-style executive packages. Several factors are driving this trend:

• Talent War: ASX-listed and private firms are competing for global talent, needing flexible, tax-smart compensation tools.

• Regulatory Changes: The 2025 updates to the Corporations Act clarified the treatment of non-superannuation employee trusts, provided they maintain creditor accessibility and comply with anti-avoidance provisions.

• Tax Office Guidance: The ATO issued draft guidance in early 2025 on deferred remuneration structures, signaling a more nuanced approach rather than outright prohibition.

Still, companies must tread carefully. Unlike superannuation, Rabbi Trusts are not tax-privileged, and the risk of immediate taxation under Division 7A or employee benefit trust rules remains if structures are not carefully drafted. Legal and tax advice is essential before implementation.

Practical Applications and Emerging Trends

Australian firms are leveraging Rabbi Trust-like arrangements in several scenarios:

• Executive Retention: Promising deferred equity or cash bonuses, with assets held in trust until vesting milestones are met.

• Cross-Border Recruitment: Offering globally mobile executives a familiar compensation mechanism, especially where US tax treaties apply.

• Succession Planning: Using trusts to stagger payouts for retiring founders or C-suite transitions, smoothing tax and business continuity risks.

Case in point: In early 2025, an ASX-listed technology firm implemented a Rabbi Trust to secure part of its CTO’s long-term incentive, aligning with US stock plan standards while ensuring compliance with new ATO guidance. The move was lauded by investors seeking stability in leadership and by the executive, who valued the clarity of deferred taxation.

Key Considerations and Risks

• Tax Compliance: Structures must avoid triggering fringe benefits tax or immediate income recognition. The latest ATO guidance provides more flexibility, but close adherence is critical.

• Insolvency Protections: To remain compliant, trust assets must be accessible to creditors—making the arrangement less secure than a true ‘asset protection’ trust.

• Documentation: Clear trust deeds and communication with executives are essential to avoid disputes and regulatory scrutiny.

• Cost: Setting up and administering a Rabbi Trust is more complex than standard bonus schemes, but may pay dividends in talent retention and tax deferral.

The Bottom Line for 2025

Rabbi Trusts remain a niche but growing tool in the Australian compensation landscape. With regulatory clarity improving and competition for talent intensifying, expect to see more innovative uses of these trusts—especially among firms with international ambitions or complex executive needs.