Below is Chapter 2 of our ‘Trust Distributions Guide’ booklet. To read the other chapters of our booklet, click the links below:
- Chapter 1: Understanding the Nature of Trusts
- Chapter 3: Making Effective Distributions
- Chapter 4: Timing, Authority and Validity of Distributions
- Chapter 5: Risk Management and Common Traps
- Chapter 6: Summary and How we can Help
What is trust law income?
As discussed above, trust law income is income according to trust law. This has been interpreted in many cases over centuries – mainly aimed at the distinction between income (that would go to a spouse) and capital (that would go to children after a period). Trust law income has also imported notions of ‘accounting income’ or income according to ordinary concepts.
For trust law purposes, the trust deed can override these common law principles to say what is, and what is not, included in trust law income for a particular trust. Some trust deeds define this in strict terms, while others allow the trustee the discretion to determine what is meant by the term ‘trust law income’ (from one income year to the next).
Trust law income is referred to by many different names, depending on the trust deed. It may be ‘trust income’, ‘income of the trust’, ‘annual income’, ‘accounting income’ or just ‘income’. Sometimes it is even referred to as ‘net income’, which is incredibly confusing, and not to be mistaken with tax law net income! All these terms used in trust deeds are referring to the same thing – trust law income.
What is assessable ‘net income’?
On the other hand, ‘taxable income’, ‘assessable income’ and ‘net income’ (as in section 95(1)) are each defined in the Tax Act 36 itself.
These terms are purely creatures of tax legislation. They only exist for the purposes of assessing tax. It is not possible for the trust deed to override tax law to change the nature of tax law net income (in contrast to ‘trust law income’). Trusts just need to accept what the tax law says.
What can a trust distribute?
This distinction is important because a trust can only distribute trust law income (being that concept established by the courts over centuries). That is all a trust can distribute. No exceptions.
A trust cannot distribute a tax law concept of income. Specifically, a trustee cannot resolve to distribute concepts like ‘taxable income’ or ‘assessable income’ or net income.
To be clear, if your distribution minutes provide that beneficiary ‘A’ gets 100% of the tax law net income, the distribution will not be effective.
Trust deeds that make trust law income equal assessable net income
Where people get confused is when the trust deed declares that trust law income is to be determined on the same basis as tax law ‘net income’, or where the trustee exercises its discretion to make trust law income equal tax law net income. In other words, this is when people use the power under the trust deed to define ‘trust law income’ to be equal to whatever the tax legislation says ‘net income’ of the trust is for that year.
People generally do this as a short-cut to get around the complexity of reconciling the trust law income with tax law net income. However, things are not that simple.
e.g. Trust law income = ‘net income’ under section 95(1)
What is happening here is that the trust deed is importing the concept of tax law net income into the trust deed. But this does not mean that the trust can now distribute tax law net income.
The trustee can still only distribute trust law income – it is just that trust law income now equals the same thing as the tax law net income defined in the Tax Act 36. The trustee’s resolution must still refer only to the trust law income.
This short-cut solution still has its problems.
Determining trust law income each year
The main thing to remember is that a trust can only distribute trust law income (however this may be defined by the trustee each income year).
PRACTICAL NOTE: For practical purposes this means that trust distributions must always refer to trust law income – as defined in the trust deed.
It is a simple matter of wording, but it is essential to get right. If a distribution minute refers to taxable income, or tax law net income, then the distribution may not be effective.
PRACTICAL NOTE: Distribution minutes should refer to the meaning of trust law income in the trust deed, i.e. how the trustee has calculated trust law income.
If there is not a fixed meaning in the trust deed, then the trustee must exercise its discretion to nominate how trust law income is to be determined. The exercise of this discretion must be included in the distribution minutes, or in separate minutes maintained by the trustee.
Importantly, if the trust deed does not provide the trustee with discretion to nominate what makes up trust law income, then the trustee must determine trust law income in accordance with the formula or according to the principles adopted in the trust deed. If no formula or principles are explicitly nominated in the trust deed, then the trustee must adopt the common law notion of trust law income. In other words, a trust can have flexibility to define trust law income how it wants, but only if the trust deed contains that specific power.
AMENDMENT: Many people amend trust deeds to give the trustee the discretion to determine what makes up trust law income. Furthermore, many people also nominate a default basis for calculating trust law income in case the trustee ever fails to exercise its discretion for that year. As noted above, the default method to define trust law income is often to calculate it on the same basis as tax law net income is calculated.
The relevance of trust accounts
It is common practice to prepare ‘trust accounts’, i.e. an accounting Profit & Loss and Balance Sheet for the trust.
Trust accounts are usually based on accounting principles. However, accounting principles do not necessarily match the trust deed definition of trust law income, or the Tax Act definition of net income. Accounting income introduces a third category of ‘income’ into the mix!
Usually, the trust accounts and the trust tax return are the only documents prepared by the trustee. Rarely, if ever, do trustees prepare a statement of ‘trust law income’. Further, often the numbers in the trust accounts are adopted in the distribution minutes. If this is the case, the trust deed must allow the trustee to determine trust law income based on the principles adopted in preparing the trust accounts. This should be minuted , if the trust accounts are being relied on.
If trust law income is defined to match tax law ‘net income’ – i.e. what is in the trust’s tax return, then the use of the accounting figures in the distribution minutes is incorrect. This is because the distribution minutes are then distributing accounting income – which does not match trust law income – and the trustee can only distribute trust law income.
Everything must always come back to the definition of trust law income – because the trustee can only distribute trust law income.
PRACTICAL NOTE: Often, in practice, trustees do not actually make a summary of what constitutes trust law income for each year. Instead, they adopt the trust accounts. If this is the case, then you need to ensure that both the trust deed and your minutes reflect this. In most cases this is not a problem, but it can be a problem if the accounting income is negative, or does not include things like capital gains.
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.
