Trust Distributions and Tax: What Every Trustee Needs to Know Before 30 June

For Australian family trust owners, the weeks leading up to 30 June are critical. The decisions made — or not made — by your trustee before that date can have a profound impact on your family's tax bill for the entire year. Get it right and you could legitimately save tens of thousands. Get it wrong (or miss the deadline) and the ATO may step in to tax the entire trust income at the highest marginal rate.

This article covers everything trustees of discretionary (family) trusts need to understand about distributions, the 30 June deadline, and the ATO's increasing scrutiny under Section 100A.

What Is a Discretionary Trust?

A discretionary (or family) trust is a legal arrangement where a trustee holds assets on behalf of a class of beneficiaries. The key feature of a discretionary trust is that the trustee has complete discretion over how to distribute the trust's income each year — hence "discretionary."

This flexibility is the trust's greatest strength. It allows the trustee to direct income to the family member with the lowest tax rate each year, minimising the family's overall tax burden. But it comes with strict legal requirements around timing and documentation.

The 30 June Deadline — Non-Negotiable

This is the most important fact about trust distributions: the trustee's resolution to distribute income must be made on or before 30 June of the income year. If no resolution is made, the trust deed typically defaults to distributing the income equally among all beneficiaries — or worse, accumulates the income in the trust at the highest marginal tax rate (47%).

How to Distribute Trust Income Tax-Effectively

The goal of trust distribution planning is to allocate income to beneficiaries who pay the least tax. The most common strategies include:

Distributing to Adult Beneficiaries on Lower Incomes

If you have adult children (18 or older) who are studying or working part-time, they may have little or no other income. Distributing up to the tax-free threshold ($18,200 for 2024–25) to each qualifying adult beneficiary can result in zero tax paid on that income. For a family with two adult children, this could mean $36,400 of trust income flowing out completely tax-free.

At higher income levels, adult beneficiaries in lower tax brackets (e.g., earning $30,000–$60,000) still pay significantly less tax than a high-income parent, making distributions to them tax-effective.

Distributing to a Corporate Beneficiary

Trusts can distribute income to a company (often called a "bucket company"). Companies pay a flat tax rate — 25% for base rate entities (those with aggregated turnover under $50 million where 80% or less of income is passive) or 30% for larger companies. This compares favourably to the highest individual marginal rate of 47%.

Income retained in a bucket company builds up as "retained earnings" that can be paid out as dividends when family members are in lower tax brackets (e.g., retirement). However, Division 7A rules apply if the company then lends money back to the trust or shareholders — so careful structuring is essential.

Distributing to the Primary Earner's Spouse

If one spouse has significantly higher income than the other, distributing trust income to the lower-earning spouse makes sense. The difference in tax rates between a 47% marginal rate (income over $180,000) and a 32.5% rate (income $45,001–$120,000) can be significant on large trust distributions.

Section 100A — The ATO's Crackdown on "Artificial" Trust Distributions

Section 100A is the most significant development in trust taxation in decades, and it's critical for every trustee to understand. The ATO has significantly increased its Section 100A audit activity since releasing its compliance guidance in 2022.

What is Section 100A? It applies where a beneficiary becomes entitled to trust income (i.e., a resolution is made in their favour), but a different person actually benefits from the funds. The classic example: income is distributed to an adult child on paper, but the parent actually receives and spends the money.

If Section 100A applies, the trust distribution is ignored for tax purposes and the amount is taxed in the hands of the trustee at the top marginal rate of 47% — regardless of who received the distribution. There is also no time limit for the ATO to raise an assessment under Section 100A, making historical arrangements potentially vulnerable.

The ATO's Green / Yellow / Red Zones

The ATO's Practical Compliance Guideline PCG 2022/2 introduced a traffic light framework for Section 100A risk:

Unpaid Present Entitlements (UPEs)

When a trustee resolves to distribute income to a beneficiary, but the cash isn't actually paid out, the beneficiary has an Unpaid Present Entitlement (UPE) — a legal debt owed by the trust to the beneficiary.

UPEs sitting in a trust for years without being paid can attract Division 7A issues (if the beneficiary is a company) or Section 100A issues (if the trust is effectively retaining the funds despite the distribution resolution). The ATO now requires that all UPEs owed to corporate beneficiaries be placed on Division 7A complying loan agreements.

The Trustee Resolution — What It Needs to Cover

A valid trustee resolution for a 30 June distribution should:

• Be in writing and signed by all trustees (or the director of a corporate trustee)
• Identify each beneficiary by name
• Specify the amount or percentage of trust income being distributed to each beneficiary
• Distinguish between different classes of income if required (e.g., capital gains, dividends, foreign income)
• Be dated on or before 30 June
• Be retained permanently as part of your trust records

Family Trust Elections (FTEs)

A Family Trust Election allows a trust to access franking credits and certain loss provisions unavailable to ordinary trusts. Once made, an FTE creates an "interposed entity" test — distributions can only flow to family members of the specified individual without triggering extra tax. Distributions outside the family group trigger a 47% tax.

If you're considering an FTE for the first time, it must typically be made before the lodgement date for the year it's first to apply, and it is irrevocable. Professional advice is essential before making an election.

Common Trust Distribution Mistakes

• Missing the 30 June deadline for the trustee resolution
• Distributing to a beneficiary but not actually paying them — creating a UPE without a complying arrangement
• Making distributions to adult children whose entitlements are never actually received by them (Section 100A red zone)
• Not keeping minutes of the trustee resolution — verbal resolutions are insufficient
• Distributing capital gains without considering the 50% CGT discount and discount capital gain streaming rules
• Distributing to non-resident beneficiaries without understanding the withholding tax obligations
• Ignoring the interaction between trust distributions, Division 7A, and bucket company lending

30 June Planning Checklist for Trustees

1. Review the trust's taxable income estimate for the year with your accountant (usually by mid-June)
2. Identify eligible beneficiaries and their expected income for the year
3. Model different distribution scenarios to find the lowest overall tax outcome
4. Check for any Section 100A risk — will the beneficiary genuinely receive and keep the funds?
5. Review any UPEs from prior years — are they on complying loan agreements where required?
6. Sign and date the trustee resolution before midnight on 30 June
7. File the signed resolution with your trust records immediately