A family trust can be a useful structure for holding a business, investments or property, but the tax result depends heavily on what happens before 30 June. This family trust tax guide explains the practical rules behind trust distributions, trustee responsibilities and the records that keep your position clear.
The central point is simple: a discretionary family trust generally does not pay tax on income that it validly distributes to beneficiaries. Instead, beneficiaries are assessed on their share of the trust’s taxable income. That can create flexibility, but it also creates paperwork, deadlines and rules that need to be handled properly.
How a family trust is taxed
A family trust is usually a discretionary trust. The trustee holds and manages trust assets for the benefit of a defined group of beneficiaries, often family members and related entities. Each year, the trustee decides how the trust income will be distributed, provided the trust deed allows it.
For tax purposes, the key figure is the trust’s taxable income. This is not always the same as the cash sitting in the trust bank account or the accounting profit shown in Xero. Taxable income is calculated under tax law after considering assessable income, deductible expenses, depreciation, capital gains and other adjustments.
If a beneficiary is made presently entitled to a share of the trust income, they generally include the relevant amount in their own tax return and pay tax at their applicable rate. The trustee may be assessed instead where income is not distributed, where a beneficiary is under a legal disability, or where a distribution is ineffective.
That distinction is why tidy bookkeeping alone is not enough. You need clean records, a current trust deed and a valid distribution decision that matches the tax work.
The trustee makes the distribution decision
The trustee is responsible for administering the trust. It may be an individual, but many business owners use a company as trustee because it can provide clearer separation between personal affairs and trust affairs. Either way, the trustee must follow the trust deed.
Before year end, the trustee needs to determine how income will be distributed. In practice, this is usually documented through a trustee resolution or distribution minute. The deadline is set by the trust deed. Some deeds require a decision by 30 June, while others allow a short period after year end. Do not assume the deadline is the same for every trust.
The resolution should clearly identify the beneficiaries, the amount or proportion of income each receives, and how different categories of income are treated where relevant. It must reflect a genuine decision, not a document prepared later to produce a preferred tax result.
A common problem is leaving the distribution decision until the business tax return is being prepared months later. By then, the opportunity to choose beneficiaries may have passed. If no beneficiary is validly entitled to the trust income, the trustee can be taxed at the top marginal rate on that income.
Cash does not always follow the tax distribution
A beneficiary can be assessed on a distribution even if they have not received the cash. The amount may remain unpaid and recorded as an amount owing to that beneficiary. This is common where a trading trust needs cash for stock, wages or working capital.
However, an unpaid distribution is not a set-and-forget entry. It needs to be properly recorded, and the use of the funds needs consideration. Where a company beneficiary is involved, unpaid entitlements and loans can raise additional tax issues. The accounting entries, trust minutes and actual movement of funds should all tell the same story.
Choosing beneficiaries: flexibility with limits
A discretionary trust can distribute income among eligible beneficiaries to suit their circumstances. This may include adult family members, companies or other trusts, but only if they fall within the class of beneficiaries in the deed.
The aim should not simply be to send income to the person with the lowest tax rate. The distribution must be permitted by the deed, properly documented and commercially supportable. The beneficiary also needs to understand that they may have tax to pay, even where they do not receive cash immediately.
Distributions to adult beneficiaries can be effective where they have lower taxable income, but their wider position matters. A distribution may affect student loan repayments, family assistance, Medicare levy outcomes or other obligations. For a beneficiary running their own business, it may also change their PAYG instalments.
Distributions to minors are subject to special rules. In most cases, unearned trust income distributed to a child under 18 is taxed at penalty rates above a small threshold. There are limited exceptions, but a distribution to children is rarely a straightforward tax-saving measure.
A corporate beneficiary, sometimes called a bucket company, may be used to cap tax on income retained for future investment. This can be useful in the right circumstances, but the funds are not tax-free and cannot be treated as the owners’ personal spending money. Later payments, loans or dividends need planning. This is an area where getting advice before the distribution is made is far cheaper than fixing it afterwards.
Capital gains, franked dividends and streaming
Not all trust income has the same tax character. A trust may receive business income, rental income, capital gains and franked dividends in the same year. Depending on the trust deed and the relevant tax rules, the trustee may be able to specifically direct certain categories to particular beneficiaries. This is often called streaming.
For example, a beneficiary who can use capital losses may be an appropriate recipient of a capital gain. A beneficiary who can benefit from franking credits may be suitable for franked dividends. But streaming requires careful wording in the trustee resolution and must be supported by the deed. A broad resolution that simply distributes “income” may not achieve the intended result.
Where a trust has owned an asset for at least 12 months, an eligible individual beneficiary may be able to access the general 50 per cent capital gains tax discount. Small business CGT concessions may also be available in some cases, although the conditions are detailed and should be reviewed before a sale is finalised.
Losses stay in the trust
A trust loss generally cannot be distributed to beneficiaries. If the trust makes a tax loss, it is carried forward within the trust and may be used against future trust income if the relevant conditions are met.
This catches business owners out when a new venture has a slow first year. The loss does not reduce the salary or business income of family members simply because they are beneficiaries. The trust needs future income to use it, and changes in control or distributions can affect whether the loss remains available.
Keep the administration as tidy as the tax plan
Good trust tax outcomes are built during the year, not just at tax return time. Separate bank accounts, reconciled bookkeeping and clear loan records make it easier to see what the trust has earned, what it owes and whether distributions are realistic.
For a trading trust, keep business expenses separate from private spending. If the trust pays personal costs for beneficiaries, record the transaction correctly rather than burying it in general expenses. The same applies to loans between the trust, beneficiaries, companies and related businesses. Informal transfers may feel harmless at the time, but they can become difficult to explain and expensive to unwind.
Your annual file should normally include the signed trust distribution resolution, financial statements, tax return working papers, beneficiary statements and records of any amounts paid or left owing. The trust deed should also be stored safely, along with any variations. An outdated or missing deed makes distribution planning much harder.
Does your trust need a family trust election?
A family trust election can be useful where the trust wants access to certain tax concessions, including the ability to pass through franking credits or use losses in particular circumstances. It also defines a family group for tax purposes.
The trade-off is that distributions outside that family group can trigger family trust distribution tax at a high rate. An election should therefore be a deliberate decision, not a standard form lodged without considering future beneficiaries and business plans. Once made, it can have long-term consequences.
A practical year-end process for family trusts
Start reviewing the trust position well before 30 June. Check year-to-date profit, expected income, asset sales, dividends, beneficiary income and any unpaid distributions from earlier years. Confirm the trust deed allows the proposed approach, then prepare and sign the trustee resolution by the required deadline.
After year end, finalise the accounts and tax return so they agree with the resolution. Give beneficiaries clear information about the income allocated to them and make sure their individual returns reflect it. If circumstances change materially before year end, update the plan rather than relying on last year’s distribution pattern.
For small business owners, the value of a family trust is not just flexibility. It is having a structure that is administered properly, with clear numbers and decisions made on time. A short review before 30 June can prevent a rushed distribution, an unexpected tax bill and a year of messy catch-up work.
