If your family operates a business or holds investments through a discretionary trust, deciding who receives the trust's income is an important annual tax decision.
Family trusts can distribute income among eligible beneficiaries, but the process is not as simple as transferring money between family members.
Trustees must follow the trust deed, make valid distribution decisions by the required deadline and keep records showing what each beneficiary is entitled to receive.
With proposed changes to discretionary trust taxation progressing through Parliament, reviewing existing arrangements is also becoming more important.
What is a family trust distribution?
A family trust is commonly established as a discretionary trust. The trustee holds assets and manages income for beneficiaries identified under the trust deed.
Those assets might include a family business, investment property, shares or other investments.
The trustee generally has discretion to decide which eligible beneficiaries receive the trust's distributable income each year, subject to the deed and applicable law.
A distribution creates an entitlement to trust income. It does not necessarily involve an immediate cash payment.
A family business earns $120,000.
Assume a discretionary trust has $120,000 of distributable income and two adult beneficiaries who are eligible under its deed.
The trustee might resolve to distribute $70,000 to one beneficiary and $50,000 to the other.
Each beneficiary's tax position depends on the trust's tax net income, their entitlement, other taxable income and the applicable tax rules.
This example assumes no special income categories or differences between trust income and tax net income.
Who can receive a distribution?
The trust deed determines who is eligible to benefit. Depending on its terms, eligible beneficiaries may include:
- Adult family members.
- Children and other relatives.
- Related private companies.
- Other trusts.
- Charities or other entities named or permitted by the deed.
Being related to the trustee does not automatically make someone an eligible beneficiary. The trustee must check the deed before making an appointment.
A trust with a family trust election must also consider the defined family group. Distributions outside that group can trigger family trust distribution tax.
How are family trust distributions taxed?
A trust generally calculates its taxable net income for the year. Beneficiaries who are presently entitled to trust income may be assessed on their relevant share of that net income.
For adult individual beneficiaries, that share is generally included in their assessable income and taxed under the rules applying to their personal circumstances.
This means a beneficiary's salary, investment income and other taxable amounts can affect the total tax payable.
The tax result may differ where beneficiaries are minors, companies, non-residents or subject to special trust taxation rules.
| Beneficiary | Key tax consideration |
|---|---|
| Adult individual | Trust income generally forms part of their assessable income. Their overall tax position matters. |
| Minor | Higher tax rates may apply to certain unearned income, subject to exceptions. |
| Private company | Company tax rules apply. Unpaid entitlements and related-party transactions require separate review. |
| Non-resident | Special trustee assessment and withholding considerations may arise. |
| Another trust | The receiving trust's deed, beneficiaries and distribution arrangements must be considered. |
Why does 30 June matter?
For most discretionary trusts using the standard Australian income year, beneficiaries must be made presently entitled to trust income by 30 June.
The trust deed may impose an earlier deadline or particular requirements for making the decision.
Trustees should not wait until preparing the tax return to decide who receives the income.
An invalid or late resolution can cause income to be assessed to default beneficiaries or the trustee, potentially at a higher tax rate.
Review the trust deed, eligible beneficiaries, estimated income and tax circumstances.
Determine the beneficiaries and their entitlements within the required timeframe.
Finalise the accounts and calculate trust net income and beneficiary shares.
Report distributions, notify beneficiaries and track amounts paid or remaining unpaid.
What should a trust distribution resolution include?
There is no single resolution wording suitable for every trust. The correct approach depends on the deed and the types of income earned.
A resolution should clearly identify the beneficiaries and how income is allocated. It must be validly made under the deed.
Trustees should also consider whether the deed permits separate treatment of capital gains and franked distributions.
Special rules apply when beneficiaries are intended to be specifically entitled to these income categories. The ATO explains the requirements in its guidance on trust resolutions .
Can a trust distribute income without paying the cash?
Yes. A beneficiary may become presently entitled to income even if the trust has not transferred the money.
The amount owed to that beneficiary is commonly called an unpaid present entitlement, or UPE.
The beneficiary may still have a tax obligation arising from their entitlement.
A $40,000 distribution remains in the trust.
A trustee resolves to distribute $40,000 to an adult beneficiary. The trust retains the cash for business expenses.
The beneficiary may be assessed on their share of trust net income even though they have not received a bank transfer.
The trustee must maintain records of the outstanding entitlement and any later payments or dealings.
What are the risks with corporate beneficiaries and Division 7A?
Some family groups distribute income to a related private company, sometimes called a bucket company.
This arrangement requires care, particularly where the trust retains funds owed to the company.
The High Court's 2026 decision in Commissioner of Taxation v Bendel established that a corporate beneficiary's unpaid present entitlement, without more, is not automatically a loan for Division 7A purposes.
That does not mean all corporate beneficiary arrangements are free from Division 7A concerns.
Actual loans, payments or financial accommodation arising from further dealings may still have consequences. Other provisions, including Subdivision EA and Section 100A, may also be relevant.
The treatment depends on the documents, transactions and actual use of the funds.
What is Section 100A and why does it matter?
Section 100A is an anti-avoidance provision addressing certain trust reimbursement agreements.
It can apply where a beneficiary's entitlement is connected to an arrangement that benefits someone else and has the relevant tax-reduction purpose, outside ordinary family or commercial dealing.
Where Section 100A applies, the trustee may be assessed at the highest marginal tax rate on the affected income.
Income allocated to one person but used by another.
A trust distributes income to an adult child on a relatively low tax rate. Under a prearranged understanding, the money is instead used for the parents' benefit.
The arrangement may raise Section 100A concerns. Whether the provision applies depends on all the facts, including the nature and purpose of the arrangement.
Trustees should keep records explaining the commercial or family reasons for distributions and how beneficiaries benefit from their entitlements.
See the ATO's Section 100A taxation ruling for the detailed requirements.
What is changing with the proposed 30% minimum trust tax?
The Australian Government has proposed a minimum tax of 30% on certain discretionary trust income, with a proposed start date of 1 July 2028.
Legislation was introduced into Federal Parliament in October 2026. As at the date of this article, the measure is not yet law.
The proposed rules would change how some family trusts are taxed, including the treatment of distributions to beneficiaries.
Proposed options include restructuring relief and an election allowing qualifying trusts to use fixed beneficiary entitlements.
The financial consequences will depend on the final legislation, the trust's income and its existing structure.
RJS has covered the proposal in more detail in Minimum Trust Tax: 30% Draft Legislation .
Trustees should review the potential effect before changing a trust deed, transferring assets or committing to a restructure.
Common family trust distribution mistakes
Missing the deadline
Leaving distribution decisions until after 30 June can produce unintended tax results.
Ignoring the trust deed
A resolution may be invalid if the beneficiary or distribution method is not permitted.
Assuming cash must be paid
A beneficiary can have a tax obligation even where their entitlement remains unpaid.
Overlooking related-party rules
Corporate beneficiaries, reimbursement arrangements and family trust elections need separate attention.
Your annual family trust checklist
- Review the trust deed and any amendments.
- Confirm who can receive trust income.
- Check family trust and interposed entity elections.
- Estimate income, capital gains and franked distributions.
- Review beneficiaries' tax circumstances.
- Make valid resolutions within the required timeframe.
- Record and reconcile unpaid entitlements.
- Review Section 100A and related-party transactions.
- Assess the potential impact of proposed trust tax changes.
Frequently asked questions
Does a family trust pay tax on distributions?
Eligible beneficiaries are generally assessed on their shares of the trust's tax net income. Trustees may be assessed in particular circumstances, including where no beneficiary is presently entitled.
Can a family trust distribute income to children?
A trust deed may permit distributions to minors, but special tax rates generally apply to certain unearned income of children. Exceptions can apply.
Must trust distributions be paid before 30 June?
Not necessarily. A valid entitlement can arise without immediate payment. The trustee must still satisfy the applicable resolution requirements and properly record unpaid amounts.
Can a trust change beneficiaries after 30 June?
Trustees generally cannot retrospectively change valid year-end entitlements simply to obtain a different tax result. Any correction requires consideration of the trust deed and relevant law.
Is the 30% minimum trust tax already law?
No. As at October 2026, legislation has been introduced into Parliament, with the measure proposed to begin on 1 July 2028. Its final form remains subject to the legislative process.
Are unpaid company distributions automatically Division 7A loans?
No. Following the 2026 High Court decision in Bendel, a corporate beneficiary's unpaid present entitlement alone is not automatically a Division 7A loan. Subsequent dealings and other tax provisions still need review.
Related RJS articles and services
Review your trust before the next distribution
Family trust distribution decisions should reflect the trust deed, beneficiaries' circumstances and the purpose of the arrangement.
A distribution that appears straightforward may create tax consequences if the documentation is incorrect or the income is ultimately used by someone else.
With changes to discretionary trust taxation under consideration, this is also a suitable time to review how your trust operates and whether its current arrangements remain appropriate for your family or business.
Need help with your family trust distributions?
Your RJS accountant can help review your trust deed, distribution resolutions, beneficiary entitlements and the potential impact of proposed tax changes.
Speak to an RJS AccountantSources and further reading
Australian Taxation Office: Trust Resolutions and Present Entitlement
Australian Taxation Office: TR 2022/4, Section 100A Reimbursement Agreements
Australian Taxation Office: PCG 2022/2, Section 100A Compliance Approach
Australian Treasury: Minimum Tax on Discretionary Trusts
Related RJS reading: Minimum Trust Tax: 30% Draft Legislation
Information current as at October 2026.
This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional adviser.
To the maximum extent permitted by law, neither R J Sanderson & Associates Pty Ltd or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content.
Liability limited by a scheme approved under professional standards legislation.
