Trust Distributions Summary – (Trust Distributions Guide Booklet Chapter 6)

Trust Distributions Guide

Below is Chapter 6 of our ‘Trust Distributions Guide’ booklet. To read the other chapters of our booklet, click the links below:

 

Summary

It is important to understand that ‘trust law income’ and tax law ‘net income’ are distinct concepts. The complexity comes down to how these concepts are to be reconciled. Under the common law, a trust can only distribute ‘trust law income’, and your trust minutes must refer to this (or similar name given in the trust’s deed).

Trust minutes that attempt to distribute tax law ‘net income’, ‘accounting income’ or some other tax concept will not be effective. This is bad because ineffective trust distributions can be assessed to the trustee at the top marginal rate (subject to any default beneficiary or ‘balance’ beneficiary entitlements).

If trust distributions are based on ‘trust accounts’ then the minutes must set out that ‘trust law income’ has been determined with reference to those trust accounts (rather than saying that the ‘accounting income’ is itself being distributed). A trustee can choose to define ‘trust law income’ in different ways (such as making it equal to the tax law ‘net income’ concept or the accounting concept) but only if the trust deed allows this discretion. Without this discretion, the trust is stuck with the common law concept of ‘trust law income’ (which could mean the trustee has no ability to distribute capital gains or franking credits – which are not recognised by the common law concept of ‘trust law income’).

‘Streaming’ of capital gains or franked distributions to specific beneficiaries can only be done if the trust deed allows for this, by allowing for different categories to be dealt with, and accounted for, separately. Care must be taken that distributions are only made to people who are (income) beneficiaries under the trust deed. The distribution minutes must also be clearly signed by the trustee at that time. A corporate trustee can sign minutes by circulating resolution under the Corporations Act 2001 (Cth).

It is important that trust minutes are prepared and executed before 30 June, and those minutes use the right wording to be effective for trust law and tax law purposes. Interim distributions can be made during the income year if the trust deed allows for the year to be divided into sub-periods.

Trust distributions may nominate a ‘balance’ beneficiary who will be taxed if the trust is audited and the ATO determines there was ‘unallocated’ taxable net income (e.g. by denying tax deductions) Having a ‘balance’ beneficiary may avoid those ‘new’ taxable amounts being taxed to the trustee at the top marginal rate.

FINAL WORD: We hope you have found this Guide useful to understand the detailed consideration required to make and record trust distributions properly. We always recommend specialist professional advice when making and recording trust distributions, to ensure you don’t get caught by these complex provisions.

 

How we can help

Navigating trust distributions and ensuring compliance with both trust law and tax legislation is a complex and technical exercise. ADLV Law bring extensive expertise in trust structures, tax law, and estate planning to help you make effective and compliant trust distributions.

Our services include…

Trust deed reviews to ensure your distribution powers and income definitions align with your objectives.

Drafting and reviewing distribution resolutions to ensure they are valid and effective under trust law and tax law.

Advice on defining and determining trust law income, including use of discretion where permitted under the deed.

Implementation of streaming strategies for capital gains and franked distributions, including updating trust deeds where necessary.

Risk mitigation strategies, including dealing with section 100A risks and ATO audit issues.

Tailored training and updates for trustees and advisors on emerging legal and tax developments.

 

Whether you are a trustee, advisor, or beneficiary, our team can help you understand your rights and responsibilities and avoid costly mistakes. Call us on 1300 654 590 or email us to make your trust distributions smarter, safer, and more strategic.

The information contained in this post is current at the date of editing – 22 August 2025.

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