Family trust distributions are how a discretionary trust allocates its income to beneficiaries each year. The trustee decides who receives what before 30 June, and the income is generally taxed in each beneficiary’s hands at their own marginal rate, allowing tax-effective income splitting when it is done genuinely and documented correctly.

Every year, thousands of Australian family trusts collect income and then distribute it to beneficiaries before 30 June. Most trustees follow their accountant’s instructions without fully understanding what’s happening — and that’s where costly mistakes creep in. Whether it’s a missed resolution, a distribution to the wrong beneficiary, or a misunderstanding of Section 100A, the consequences can be significant. In this guide, I’ll explain exactly how trust distributions work, what the ATO requires, and the strategies that legitimately reduce your family’s tax bill.

If you haven’t yet set up a family trust, read our guide on how to set up a family trust in Australia first — it covers the structure, setup steps, and costs involved. This post assumes your trust is already operational and you’re focused on what to do each financial year. For a broader look at all structure options — including how a family trust fits within the full range of Australian business structures — see our complete guide to business structures in Australia. For tailored help choosing the right entity type, our business structuring service can also guide you through the decision.

What Are Trust Distributions and How Do They Work?

At the end of each financial year, the trustee of a discretionary (family) trust must decide how to allocate the trust’s net income among its beneficiaries. This is called making a distribution. Unlike a company dividend or a salary, trust distributions are flexible — the trustee can choose different amounts for different beneficiaries each year, and can even exclude certain beneficiaries entirely.

The trust doesn’t pay tax directly on its income. Instead, the net income “flows through” to the beneficiaries, who include it in their own tax returns and pay tax at their applicable marginal rates. This pass-through mechanism is what makes family trusts so powerful for tax planning — it allows the trustee to direct income towards beneficiaries with lower marginal tax rates.

Here’s a simplified example. Suppose Mina’s Family Trust earns $200,000 in net income for the 2025-26 financial year. Mina (the primary income earner) pays tax at 47% on personal income. His spouse earns $40,000 and his adult daughter is studying. The trustee could distribute $90,000 to the spouse (saving significant tax at the lower marginal rate), $20,533 to the adult daughter (up to the tax-free threshold), and the remainder to a bucket company at 25% corporate rate. This kind of strategic distribution is entirely legal — it is the design of the trust structure.

Who Can Receive Distributions? The Beneficiary Classes Explained

A family trust deed defines who can be a beneficiary. In most discretionary trust deeds, the beneficiary class is broadly defined to include:

• The primary beneficiary (usually the person who set up the trust)
• Their spouse or de facto partner
• Children and grandchildren (including future descendants)
• Siblings and their families
• Companies or trusts in which any of the above hold an interest

The trustee resolution each year specifies which eligible beneficiaries actually receive income in that financial year, and in what proportions. If the trust deed doesn’t include someone, you simply cannot distribute to them — no matter how logical it might seem. This is why getting the trust deed drafted correctly from the outset is critical. See our article on setting up a family trust for guidance on beneficiary class drafting.

The 30 June Trustee Resolution — The Single Most Important Date in Trust Administration

Under Australian tax law, the trustee of a discretionary trust must make and document a resolution about how trust income is distributed before 30 June each year. This is not a suggestion — it is a legal requirement.

If no resolution is in place by 30 June, the ATO’s default provisions apply. Typically this means all the net income of the trust is assessed to the trustee at the top marginal rate of 47% — the worst possible outcome. That is a significant and completely avoidable tax bill that arises purely from an administrative failure.

The trustee resolution (sometimes called a “distribution minute”) must:

• Be made and signed before midnight on 30 June
• Specify each beneficiary and their entitlement (either a dollar amount, a percentage, or “the balance”)
• Refer correctly to the financial year it applies to
• Be kept on file as part of the trust’s administration records

We published a detailed breakdown of trust distribution minutes and what they must contain — essential reading for any trustee approaching financial year end.

Tax Implications by Beneficiary Type

The tax treatment of a trust distribution depends on who receives it:

Individual beneficiaries: The distributed income is included in the individual’s assessable income and taxed at their marginal rate. An individual on a low income (say, $30,000 per year) will pay 16–19 cents in the dollar on a distribution, compared to 45–47 cents for a high-income earner.

Company beneficiaries (bucket companies): A company that is a beneficiary of a trust pays corporate tax at either 25% (base rate entity) or 30% on trust distributions. This is a flat rate — significantly lower than the 47% top marginal rate applicable to individuals. Read our detailed guide on using a bucket company with a family trust to understand how to access the money afterwards.

Another trust: Where permitted by both trust deeds, income can be distributed from one trust to another. Tax is then assessed on the ultimate beneficiaries of the receiving trust.

Minors (under 18): This is where many trustees get caught. Under Division 6AA of the ITAA 1936, income distributed to minors from a discretionary trust is taxed at penalty rates — up to 68% on amounts above the minor’s low-income threshold. There is no benefit to distributing income to your teenage children. See the FAQ section below for more detail.

Income Splitting: The Core Tax Benefit of a Family Trust

Income splitting is the practice of distributing trust income to multiple beneficiaries who each pay tax at lower marginal rates, rather than concentrating all the income in the hands of one high-income earner. It is entirely legal and has been a cornerstone of Australian tax planning for decades.

The ATO’s guidance on trusts makes clear that discretionary trusts are specifically designed to allow this flexibility. What the ATO does scrutinise is whether distributions have a genuine nexus to the beneficiary — i.e., they actually receive the benefit — or whether there is an artificial arrangement designed to avoid tax without genuine economic substance.

Common income splitting strategies include:

• Distributing up to the tax-free threshold ($18,200 for 2025-26) to adult children or a low-income spouse
• Splitting the remainder between beneficiaries in lower tax brackets
• Capping personal distributions at $180,000 and distributing the rest to a company at 25-30%
• Using multiple beneficiaries strategically to flatten the overall effective tax rate

ATO Section 100A — What It Is and How to Avoid It

Section 100A of the ITAA 1936 is the ATO’s main tool for challenging trust distribution arrangements it considers artificial. Our full guide to Section 100A and trust reimbursement agreements explains the risk zones in detail. It applies when a beneficiary is made presently entitled to trust income but the economic benefit is actually enjoyed by someone else — and there is a “reimbursement agreement” in place.

The ATO’s Section 100A guidance sets out its compliance approach. In practice, this matters most when:

• A beneficiary is entitled to income on paper but the trustee retains or redirects the cash
• The beneficiary doesn’t actually receive or use the funds distributed
• There is a pre-arranged understanding that the beneficiary will “give back” the distribution

The safe harbour is straightforward: make genuine distributions, ensure beneficiaries actually receive the money (or have it credited to their loan accounts properly), document everything, and avoid arrangements where the distribution is nominal but the benefit flows elsewhere. A well-maintained trust, run with proper accounting and annual resolutions, is unlikely to attract Section 100A scrutiny.

Income Streaming: Directing Different Types of Income to Different Beneficiaries

Under certain conditions, a trust can “stream” different categories of income to different beneficiaries. The most common example is directing capital gains (which qualify for the 50% CGT discount if the asset was held for more than 12 months) to beneficiaries who can make best use of the discount, while directing ordinary income to low-income beneficiaries.

Streaming must be specifically permitted by the trust deed and must follow the rules in Subdivision 115-C of the ITAA 1997. Not all trust deeds allow streaming, so it is worth checking with your accountant whether this strategy is available to you.

Capital Gains Distributions and the 50% CGT Discount

When a family trust sells an asset it has held for more than 12 months — such as shares or an investment property — the capital gain qualifies for the 50% CGT discount at the trust level. The trust does not pay CGT directly; instead, the “discount capital gain” is distributed to beneficiaries, who include it in their own returns.

An individual beneficiary can apply the 50% discount to their share of the gain, effectively halving the taxable amount. A company beneficiary, however, does not get the 50% CGT discount — the full amount of the gain is taxable at 25-30%. This is an important consideration when deciding how to distribute capital gains from a trust.

Common Mistakes to Avoid

The most common trust distribution mistakes we see in practice:

• Missing the 30 June resolution deadline. The single most costly administrative error. Set a calendar reminder for mid-June every year.
• Distributing to minors. Minor beneficiaries are taxed at penalty rates on trust distributions — there is virtually no tax benefit and a significant tax cost.
• Distributing to a beneficiary who is bankrupt. Trust assets and distributions can be claimed by a trustee in bankruptcy in certain circumstances.
• Ignoring the trust deed’s beneficiary class. The trustee can only distribute to people or entities specifically included in the deed. Distributing to someone outside the class is a legal breach.
• Using trust distributions as informal loans. If money is distributed to a beneficiary but remains in the trust account, it can be treated as a trust loan with tax consequences.

Frequently Asked Questions

Can I distribute different amounts to beneficiaries each year?

Yes — this is one of the key advantages of a discretionary trust. The trustee has full discretion to change the allocation each year based on each beneficiary’s income, tax position, and financial needs. You are not locked into a fixed distribution formula.

What happens if no trustee resolution is made by 30 June?

If no valid resolution is in place by 30 June, the default provisions under the ITAA 1936 typically apply, and the net income is assessed to the trustee at the top marginal rate (47%). This can mean tens of thousands of dollars in avoidable tax. Never miss the 30 June deadline.

Can a family trust distribute income to a company?

Yes, provided the company is listed as an eligible beneficiary in the trust deed. Distributing to a company (often called a “bucket company”) at the 25% corporate rate, where the company is a base rate entity, is a common and effective tax strategy. A distribution from a trading trust normally keeps the company on 25%; where the trust’s income is mainly rent, dividends or capital gains the company is usually taxed at 30% instead. We explain this in detail in our family trust and bucket company strategy guide.

Can I distribute to my children who are under 18?

Technically yes, but it is almost never advisable. Division 6AA imposes penalty tax rates on “unearned income” received by minors from trusts — typically 68 cents in the dollar on amounts above $416. There is no tax benefit, and you will likely pay more tax than if the distribution went to any adult beneficiary.

Does the trust need to lodge its own tax return?

Yes. A family trust must lodge a Trust Tax Return each year, regardless of whether it distributes all its income. The return shows the trust’s income, expenses, and how the net income was distributed. It is separate from each beneficiary’s individual tax return.

What is a “present entitlement” and why does it matter?

A beneficiary becomes “presently entitled” to trust income when the trustee’s resolution specifically allocates income to them before 30 June. Once presently entitled, the beneficiary is assessable for that income in that tax year — even if they haven’t physically received the money yet. Understanding this distinction is crucial for proper trust administration.

How long do I need to keep trust records?

Under the tax law, you must keep records for at least five years after they are prepared, obtained, or when the transactions they relate to are completed. For trusts, this means trust deeds, trustee resolutions, financial statements, and tax returns for at least five years. However, trust deeds and structural documents should be kept indefinitely.

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Family Trust Distributions: What’s Changed in 2025–26

Trust distributions have never been more closely scrutinised by the ATO than they are right now. After years of relatively quiet acceptance of discretionary trust income splitting, the ATO has significantly sharpened its focus on how trusts distribute income to beneficiaries — particularly where low-rate beneficiaries are used to reduce tax while the economic benefit flows back to someone else. If your trust has been running on autopilot, 2025–26 is the year to review every aspect of how you are managing it.

The ATO’s heightened scrutiny stems directly from its 2022 Taxpayer Alert TA 2022/1 on Section 100A reimbursement agreements, followed by detailed practical compliance guidance. The ATO has identified specific patterns that attract attention:

• Distributions to adult children who don’t receive the cash: If you distribute income to your adult child but they don’t actually receive the funds — they stay in the trust or are enjoyed by a high-income beneficiary — this is a classic Section 100A scenario.
• Circular arrangements: Trust distributes to Company A, Company A loans back to Trust, Trust loans to Beneficiary. The ATO looks through these arrangements and may treat the entire structure as artificial.
• Accumulated unpaid present entitlements: If beneficiaries have accumulated unpaid present entitlements going back years, the ATO wants to know why they have not been paid and where the money has gone. Large, unexplained UPE balances remain a red flag under Section 100A. Where the entitlement is owed to a corporate beneficiary, the Division 7A limb to watch is Subdivision EA rather than section 109D: following Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, an entitlement the company simply leaves outstanding is not a loan in its own right, but a payment or loan from the trust to a shareholder of that company or their associate, or a forgiveness of their debt, can still deem a dividend while the entitlement is unpaid.
• Distributions inconsistent with economic reality: Very large distributions to low-income beneficiaries who clearly do not have the financial need or capacity to invest such amounts will attract scrutiny.

Beyond distribution choices, the ATO now expects trustees to maintain a minute book — a complete record of all trustee decisions, not just the annual income distribution resolution. This includes changes to trustees, major asset transactions, and any significant decisions affecting the trust. A properly maintained minute book is your best evidence in an ATO review that the trust is being run legitimately.

The practical takeaway for 2025–26: distributions that are tax-effective and ATO-defensible are not always the same thing. At Pinnacle, we review each trust client’s full income position in May each year, model the optimal distribution strategy, consider Section 100A implications for every proposed distribution, and ensure beneficiaries genuinely receive the benefit they are entitled to — not just on paper. Speak to Mina before your next 30 June to make sure your trust distributions are both optimised and protected.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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