A discretionary family trust is one of the most common ways small businesses and investors in Melbourne’s west hold assets and run a business. Its big advantage is flexibility: each year the trustee decides which family members receive the income. That flexibility comes with strict timing and paperwork rules, and the ATO has been reviewing trust distributions closely. This guide explains how family trust distributions work, the 30 June deadline, and the mistakes that turn a tax-effective structure into a tax bill at the top rate.
How a trust is taxed
A trust is not usually taxed itself. It lodges its own tax return, and each beneficiary who is “presently entitled” to a share of the trust’s income pays tax on their share of the trust’s taxable income in their own return. Where no beneficiary is presently entitled, the trustee is generally taxed on that income at the highest marginal rate plus the Medicare levy.
The 30 June resolution
Beneficiaries become presently entitled when the trustee validly resolves to distribute income to them. The ATO’s guidance for trustees is clear: resolutions must be made by 30 June of the income year, in the way the trust deed requires. A resolution made in August when the accounts are finished is too late. If no valid resolution is made, the deed’s default beneficiaries may be entitled, or the trustee may be assessed at the top rate.
A good resolution:
- Is made by the right trustee (the directors of a corporate trustee, or all individual trustees) on or before 30 June
- Follows the deed’s definition of income, which may differ from accounting profit or taxable income
- Names beneficiaries who are actually eligible under the deed
- States amounts or percentages clearly, and streams capital gains and franked dividends separately if the deed allows and you want to
- Is documented and signed, and kept with the trust records
Check who can actually receive income
Distributions to someone who is not a beneficiary under the deed are not valid. Where the trust has made a family trust election, distributions outside the family group of the nominated test individual trigger family trust distribution tax at the top rate. Check the deed and any election before choosing beneficiaries, particularly for in-laws, companies and other trusts.
Section 100A: distributions that are not really received
A common past practice was to distribute income to an adult child or relative on a low tax rate, while the money was actually used by the parents. Section 100A can apply where a beneficiary is made entitled to income under an arrangement where someone else gets the benefit of it, and the arrangement is not an ordinary family or commercial dealing. If it applies, the trustee is taxed at the top rate. Since its 2022 guidance, the ATO has been actively reviewing these arrangements. The safest position is that the beneficiary who is taxed on the income actually receives and benefits from it.
Distributions to companies
Many family groups distribute to a “bucket company” to cap tax at the company rate. If the trust does not pay the money to the company, the unpaid amount can be treated as a loan from the company under Division 7A, with interest and minimum repayments required. See our Division 7A guide.
TFNs and record keeping
- Closely held trusts must report beneficiaries’ TFNs to the ATO, and withhold tax at the top rate from distributions to beneficiaries who have not provided one
- Keep written evidence for every expense: the ATO notes bank statements alone are not enough
- Keep records of losses from the year they arise until the review period ends for the year they are used
- Trustees and beneficiaries must meet the holding period rules to claim franking credits on dividends
From 1 July 2027: capital gains in trusts
The 50% CGT discount that trusts pass to individual beneficiaries is being replaced by cost base indexation for gains accruing from 1 July 2027, with a 30% minimum tax on real gains. Trusts holding property or shares should plan for valuations at that date. See our small business CGT guide for detail.
Frequently asked questions
When is the trust tax return due?
It depends on the trust’s size and lodgment history. Most small family trusts lodged through a tax agent fall under the agent’s lodgment program, but trusts with overdue returns can be due as early as 31 October. Your agent will confirm the date.
Can I change a distribution after 30 June?
Generally no. A valid resolution made by 30 June fixes the entitlement. That is why year-end planning, with estimated figures, needs to happen in June.
Can a trust distribute a loss?
No. Losses stay in the trust and can only be used against future trust income if the trust loss rules are passed.
Trust accounting in Melbourne’s west
Kennedy Tax & Business Services prepares trust accounts, resolutions and tax returns, and reviews distributions for section 100A and Division 7A risks. See our tax planning and structuring service or contact us before 30 June.
This article is general information only and does not take into account your circumstances. Trust tax law depends heavily on the terms of the trust deed. Speak to a registered tax agent before acting.
