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Trust Distributions Explained: What Trustees Should Know

Last reviewed: 2026-06-15Trust & SMSF

Trust Distributions Explained: What Trustees Should Know

In short: in most family trusts the beneficiaries (not the trust) pay the tax on trust income, based on who the trustee makes "presently entitled" to it. The single most important rule is that the trustee's resolution deciding this must be made by 30 June each year. Miss it, and the trustee can be taxed on the income at the top marginal rate. The ATO watches this area closely, so get your resolution right and in writing before year end.

Discretionary (family) trusts are a common structure for small businesses and investors around Mortdale and the St George area. They offer flexibility in how income is shared - but that flexibility comes with rules that are easy to get wrong, and mistakes here can be costly.

This guide explains the basics in plain English. Trusts are a genuinely technical area and the ATO watches this space closely, so treat this as background reading - the detail of your own trust should always be worked through with us.

What is a trust distribution?

A trust does not usually pay tax on income that it distributes. Instead, the trustee decides how the trust's income for the year is shared among the beneficiaries, and each beneficiary is then taxed on their share at their own marginal rate. In a discretionary trust, the trustee has discretion (within the trust deed) over who receives what.

The key word is entitled. For tax purposes, what matters is which beneficiaries the trustee makes presently entitled to the income for the year - not who actually receives cash.

The 30 June trustee resolution

This is the single most important date for trustees to remember.

To be effective in deciding who is assessed on the trust's income, the trustee's resolution making beneficiaries presently entitled must be made by the end of the income year - 30 June. If you make the resolution in time, the income is taxed to the beneficiaries you chose. If you do not, the consequences can be expensive (see below).

A few practical points:

  • Get it in writing. While the deed sets the rules, a clear written record is essential - especially if you want to stream particular kinds of income.
  • Do it before 30 June, not after. A resolution dated 1 July is too late for that year.
  • Check your trust deed first - it governs what the trustee can and cannot do.

Who pays the tax - beneficiaries or the trustee?

In the normal case, beneficiaries who are presently entitled to a share of trust income are taxed on that share at their own rates. But if income is left without any beneficiary presently entitled to it - for example, because no valid resolution was made by 30 June - the trustee can be assessed instead, and that may be at the top marginal rate. That is far higher than most individuals pay, which is why the 30 June deadline matters so much.

Streaming capital gains and franked dividends

"Streaming" means directing particular categories of income - such as capital gains or franked dividends (with their franking credits) - to specific beneficiaries, rather than just sharing the overall income. This can be useful, but it has its own strict rules and timing:

  • For franked distributions, the trustee of a discretionary trust must make a written resolution specifically dealing with them by 30 June.
  • For capital gains, the relevant resolution generally must be made by 31 August following the income year.

Streaming only works if it is done correctly and the deed allows it. This is an area where getting the wording and timing right really matters.

A careful word on ATO scrutiny

Trust distributions are an area the ATO actively reviews. In particular, there is an anti-avoidance rule known as section 100A dealing with "reimbursement agreements" - broadly, arrangements where one person is made presently entitled to trust income but someone else gets the real benefit of it. Where it applies, the income can be assessed to the trustee at the top marginal rate instead.

The ATO has said it is generally not concerned with ordinary family trusts where the family members made entitled actually enjoy the benefit of their distributions. The risk arises with more complex or artificial arrangements. We are not going to give specific advice on section 100A here - it depends heavily on the facts - but the takeaway is simple: distributions that look fine on paper can attract attention if the money flows somewhere else. If your trust distributes to adult children, related companies, or other entities, talk it through with us before 30 June, not after.

One area drawing particular attention recently is unpaid present entitlements (UPEs) - where a beneficiary (often a company or adult child) is made entitled to income on paper but the cash is retained and used elsewhere in the family group. The ATO has signalled an ongoing focus here, and it has updated the trust distribution reporting (the statement of distribution) for Tax Time 2026 to capture more detail. The practical message is unchanged: keep arrangements genuine, document them, and get advice before year end if your structure is at all complex.

Our trust and SMSF service helps trustees get their resolutions right and lodged on time, and our business advisory work looks at distributions as part of the bigger picture. Because the resolution deadline lands at year end, it is worth reading alongside our tax planning before 30 June guide; if your group also runs a self-managed fund, see your first SMSF tax return.

FAQ

What happens if I forget to do the resolution by 30 June? The trustee may end up being assessed on the income at the top marginal rate, rather than the income being taxed in the beneficiaries' hands. That is usually a worse outcome. The fix is prevention - we send reminders and prepare resolutions before year end.

Can I just decide distributions when I do the tax return after 30 June? No. For the resolution to determine who is assessed, it must be made by 30 June. Deciding after year end is too late for that year, even if the return is lodged later.

Do I have to actually pay the cash to beneficiaries? Present entitlement is about who is entitled, not who has been paid yet. But unpaid entitlements raise their own issues (including ATO scrutiny), so how and when amounts are paid does matter. Check your situation with us.

Get your distributions sorted before year end

The difference between a good outcome and an expensive one often comes down to a resolution made in time and worded correctly. If you run a trust anywhere around Mortdale or the St George area, the best time to plan distributions is before 30 June - get in touch or call us on (02) 9580 1167 and we will help you get it right.

Written by the team at MJE Business Services, a registered tax agent (No. 26313222) serving the St George area since 2000.

This is general information, not personal advice. Tax rules and dates change - please check your situation with us or at ato.gov.au.

Sources (ATO)

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