Family Trust Distributions: A Guide for Business Owners

If your business runs through a family trust, the decisions you make each June about family trust distributions can have a big impact on how much tax your family pays. Get them right and you can spread income across the family in a way that is fair, legal and tax effective. Get them wrong and the ATO can tax the income at the top marginal rate, or worse, challenge the whole arrangement.

This guide explains how family trust distributions work, the rules you need to follow, and the common mistakes we see business owners make. It is general information only, so always get advice for your own situation.

What are family trust distributions?

A family trust is usually a discretionary trust. The trustee (often a company you control) holds the business or investments for a group of beneficiaries, such as you, your spouse, your children and related companies or trusts.

Each year the trustee decides how to split the trust’s income between those beneficiaries. That decision is the distribution. The trust itself generally doesn’t pay tax. Instead, each beneficiary includes their share in their own tax return and pays tax at their own rate.

This flexibility is the main reason so many business owners use a trust. It is also why the ATO watches how trustees make distributions.

How the ATO taxes family trust distributions

The basic rule is simple. The beneficiary with a present entitlement to the income pays the tax on it. However, a few details make a big difference.

• Adult beneficiaries pay tax at their normal marginal rates, so distributing to a family member on a lower income can reduce the family’s overall tax.
• Minors pay penalty rates on most unearned income above a small threshold, so distributing to young children rarely helps.
• A corporate beneficiary (a “bucket company”) pays tax at the company rate, which can cap the tax on surplus profits. However, it brings its own rules, including Division 7A.
• No valid resolution can mean the income goes to default beneficiaries under the deed, or the trustee pays tax at the top marginal rate.

Key rules for family trust distributions

1. Make your resolution by 30 June

In most cases the trustee needs to decide who is entitled to the income by 30 June. Many trust deeds also set out exactly how the trustee must make and record that decision. If the resolution is late, missing or doesn’t follow the deed, the planned split may not work. As a result, the family could face a much bigger tax bill.

2. Follow your trust deed

Your deed is the rulebook. It sets out who can be a beneficiary, what counts as income, and whether the trustee can stream certain types of income, such as capital gains or franked dividends, to particular beneficiaries. So before you plan any distribution, check that the deed actually allows it.

3. The money should really benefit the beneficiary

This is where section 100A comes in. If the trustee distributes income to one person, but someone else really gets or uses the money, the ATO may treat it as a “reimbursement agreement”. For example, the rule could catch a distribution to an adult child who then hands the money back to the parents. In that case the trustee can pay tax at the top rate. The ATO has published detailed guidance on this, and you can read more on the ATO’s trusts pages.

4. Watch unpaid distributions to companies

Distributing to a bucket company can work well. However, if the trust keeps the cash and doesn’t pay the company, the ATO may treat that unpaid amount as a loan under Division 7A. Our guide to Division 7A loan agreements explains how to manage these loans.

5. Consider a family trust election

A family trust election can help a trust use past losses and claim franking credits. It also limits who the trust can distribute to without extra tax. If income goes outside the family group, family trust distribution tax can apply at the top rate. Because of this, an election should be a deliberate decision, not a box ticked by default.

Planning family trust distributions each year

Planning family trust distributions should start well before June. Here is a simple process that works for most business owners:

1. Review the numbers in April or May. Estimate the trust’s net income for the year, including any capital gains.
2. Look at each beneficiary’s other income. A beneficiary who already earns a high salary won’t save much tax.
3. Decide how the cash will flow. Work out whether you will pay distributions, use them for family costs, or leave them owing.
4. Check the deed and the ATO rules. Make sure every beneficiary is eligible and the arrangement passes the section 100A test.
5. Document the resolution by 30 June. Then keep a signed copy with your records.

Doing this as part of regular tax planning, rather than as a rush job at year end, is one of the best ways to avoid surprise tax bills.

Common trust distribution mistakes

We regularly see the same problems when business owners move to Venta from another firm. The most common are:

• Resolutions prepared after 30 June, or not prepared at all.
• Distributions to adult children that end up paying the parents’ expenses.
• Large unpaid amounts owed to a bucket company with no Division 7A plan.
• Distributing to beneficiaries who aren’t eligible under the deed.
• Using a trust out of habit, when a different structure would now suit the business better.

If any of these sound familiar, it may be time to review your structure. Our article on sole trader vs company tax rates is a useful starting point for comparing options.

Family trusts, tax and asset protection

Tax is only part of the picture. A well set up family trust can also help protect assets, because the assets belong to the trust rather than to you personally. However, that protection depends on how you run the trust. Large unpaid distributions owed to you, for instance, can be an asset that creditors may claim.

So it pays to think about tax, cash flow and risk together. Our guide to asset protection for business owners covers this in more detail. You may also find our article on how to pay yourself as a business owner helpful, because trust distributions are often part of that mix.

Next step: get your trust distributions reviewed

If your accountant only mentions your trust when the tax return is due, you are probably missing opportunities. At Venta, we review family trust distributions with you before 30 June, so you can plan, document and defend every decision.

Our Business X-Ray is the easiest place to start. We look at your structure, your numbers and your tax position, then show you where you could save tax, grow profit and protect what you have built. Book your Business X-Ray today.

FAQ: family trust distributions

Can I distribute trust income to my children?

You can distribute to adult children who are beneficiaries under the deed, and they pay tax at their own rates. However, the money should genuinely benefit them. Children under 18 usually pay penalty rates on distributions, so they rarely save tax.

What happens if I miss the 30 June deadline?

If the trustee doesn’t make a valid resolution in time, the income may go to the default beneficiaries named in the deed. In some cases the trustee pays tax at the top marginal rate. Either outcome can be costly, so it is worth planning early.

Do trust distributions have to be paid in cash?

Not always. A beneficiary can be entitled to income that is left owing to them. However, unpaid amounts can create Division 7A, section 100A and asset protection issues, so manage them carefully with your accountant.