Trust Distribution Basics

Discretionary trusts give families flexibility in how business and investment income is shared — but that flexibility comes with paperwork that has real teeth. We regularly see trustees caught out not by the tax law itself, but by a resolution that was made too late, worded too loosely, or never actually signed.

How trust distributions work

A trust generally does not pay tax on income that beneficiaries are made "presently entitled" to. For a discretionary trust, that entitlement is created by a trustee resolution deciding who receives what share of the year's income. Beneficiaries then include their share of the trust's taxable income in their own returns — even if the cash has not actually been paid to them. And the distribution must be permitted by the trust deed: the deed, not habit, determines who can receive income and how income can be defined.

Why the 30th June resolution matters

For most discretionary trusts, the resolution must be made by 30th June — before the year ends, not months later when the accounts are finalised. If no beneficiary is presently entitled by that date, and the deed's default clauses do not save the position, the trustee can be assessed on that income at the top marginal tax rate. A resolution cannot be backdated, and the ATO has flagged that it may ask trustees for evidence of when a resolution was actually made.

What we commonly see go wrong

• Resolutions signed in September when the accounts are done, dated 30th June.
• Distributions to a beneficiary the deed does not actually allow, or a deed never updated after family or business changes.
• Vague wording that does not deal with the difference between accounting income and taxable income, or does not support streaming capital gains or franked dividends.
• Entitlements to a corporate beneficiary left unpaid, creating Division 7A exposure.
• Distributions to adult children whose entitlement quietly flows back to the parents — the ATO's section 100A guidance targets exactly this pattern.

The records trustees should keep

Keep the signed and dated resolution for every year, the trust deed and all variations, distribution statements showing each beneficiary's share, and evidence that entitlements were paid or properly accounted for. If capital gains or franked dividends are streamed, keep the workings that show the specific entitlement. These records need to exist at the time — reconstructing them later is exactly what review activity is designed to detect.

When to get advice

Distribution planning is best done in May or June, while there is still time to check the deed, consider each beneficiary's position and prepare a resolution that matches the deed's definitions. If your trust has a corporate beneficiary, adult-child distributions, or a deed nobody has read in years, those are the files to review first.

Do beneficiaries pay tax on money they never received?

They can — tax follows present entitlement, not cash. A beneficiary made presently entitled to trust income includes it in their return even if the amount stays in the trust as an unpaid entitlement.

What happens if the trustee misses the 30th June resolution?

Depending on the deed, default beneficiary clauses may determine who is entitled, or the trustee may be assessed on the income at the top marginal rate. The deed needs to be read carefully, and quickly.

Can we change a distribution after year end?

Generally no — the resolution made by 30th June fixes entitlement for that year, which is why the wording is worth getting right the first time.