Trust Tax Basics

Trusts are one of the most common structures for Australian family businesses and investments, yet how they are actually taxed remains a mystery to many of the people running them. The short version: the trust itself usually pays no tax — the tax follows the income out to whoever is entitled to it, at their own rates. The long version is where the traps live.

How a trust is taxed

Each year the trustee lodges a trust tax return showing the trust's net income — the taxable income calculated under tax law, which is often different from the accounting profit in the financial statements. That net income is then assessed to beneficiaries in proportion to their present entitlement to the trust's income, at each beneficiary's own marginal rate. If no one is presently entitled to some of the income, the trustee is generally assessed on it at the top marginal tax rate — the outcome trust administration is designed to avoid.

What beneficiaries report

Beneficiaries include their share of the trust's net income in their own tax return for the same year, whether or not the cash was actually paid to them. The character of income can flow through: franked dividends can carry their franking credits to the beneficiary, and capital gains can carry the CGT discount, provided the deed and the resolution support streaming those amounts to specific beneficiaries. A proper distribution statement from the trustee — showing the breakdown between income types — is what makes the beneficiary's return accurate.

Why timing matters

Present entitlement must exist by 30th June, which for discretionary trusts means a trustee resolution made by that date. That is earlier than most people expect: the accounts are rarely finished by then, so resolutions are typically framed as percentages or formulas rather than final dollar figures. Leaving the decision until the return is being prepared is not an option — a late resolution risks trustee assessment at the top rate, and backdating is never the fix.

What we commonly see go wrong

• Confusing accounting profit with taxable net income, so beneficiaries end up assessed on more (or less) than anyone expected.
• Trust losses — losses stay trapped in the trust and cannot be distributed to beneficiaries, and using them against future trust income has its own tests.
• Streaming capital gains or franked dividends without the deed powers or resolution wording needed to support it.
• Ignoring the Division 7A interaction when a company is a beneficiary and its entitlement goes unpaid.

When to get advice

Before 30th June each year for the distribution decision, and before any significant event inside the trust — a property sale, a restructure, adding beneficiaries, or making a family trust election. Each of those changes who can receive income and how it will be taxed, and they are far easier to plan in advance than to unwind afterwards.

Does a trust ever pay tax itself?

Yes — most commonly the trustee is taxed, generally at the top marginal rate, when no beneficiary is presently entitled to some or all of the income. Trustees can also be taxed in special cases such as certain distributions to minors or non-resident beneficiaries.

Why is my share of trust income different from the cash I received?

You are taxed on your share of the trust's taxable net income, which is worked out under tax law and can differ from both accounting profit and the cash paid — timing differences, non-deductible expenses and capital gains all contribute.

Can a trust distribute a loss to me so I can claim it?

No — trust losses cannot be passed out to beneficiaries. They stay in the trust and may only be used against future trust income if the trust satisfies the relevant loss tests.