Trusts are a common structure for families and small businesses, but the ATO taxes them in a genuinely different way to individuals or companies, which often causes confusion. However, once you understand the basic mechanics particularly around distributions the structure makes a lot more sense.
A trust is a legal arrangement where a trustee holds and manages assets or income on behalf of beneficiaries, according to the terms of a trust deed. Consequently, the ATO doesn’t tax the trust itself the same way it taxes an individual or company. Instead, the tax treatment depends heavily on how the trustee distributes income.
If the trustee distributes trust income to beneficiaries by year end, the ATO generally taxes that income in the hands of the beneficiaries at their own marginal tax rates, not at the trust level. However, if the trust retains income instead of distributing it, the ATO can tax it at a much higher rate, often the top marginal rate. This is why annual distribution decisions matter so much.
Trustees generally need to formally decide how they’ll distribute income before June 30 each year, and document that decision through a trustee resolution. Consequently, missing this deadline can push the trust itself into a significantly higher tax rate than if the trustee had properly resolved distributions in time.
Distributing income across beneficiaries such as family members on lower marginal tax rates can produce a more tax-effective overall outcome than concentrating all income with a single high-income earner. Therefore, this flexibility is one of the main reasons family and discretionary trusts remain a popular structure for both families and small businesses.
If you receive a distribution from a trust, you need to include that amount in your own personal tax return, even if you never physically received the cash. This can happen if the trust retains it for reinvestment. Consequently, it’s important to understand exactly what the trust has distributed to you and reflect it accurately in your own return.
Missing the trustee resolution deadline. This is one of the most costly and avoidable mistakes, since it can push undistributed income into a dramatically higher tax rate.
Distributing to beneficiaries who can’t actually receive the benefit. Distributions need to reflect genuine entitlements under the trust deed, not just a tax-minimisation exercise.
Not keeping the trust deed and resolutions properly documented. Poor record-keeping around trust decisions can create real problems if the ATO reviews the structure.
Trusts offer flexibility and potential tax benefits, but they also come with additional complexity, compliance costs, and administrative obligations compared to simpler structures. Therefore, whether a trust makes sense depends on your specific family, business, and income circumstances, not a generic rule of thumb.
EBATS prepares trust tax returns, manages trustee resolutions before the June 30 deadline, and advises on whether a trust structure suits your situation.
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