Trust Distributions: What the ATO Wants You to Know

The ATO has made it clear – they’re taking a much closer look at how trusts distribute income and who ends up receiving it. So, if you’re a trustee, it’s more important than ever to get those distribution decisions right.

Start with the Trust Deed

Before you do anything, grab your trust deed. The deed outlines what the trust can do, who can receive income, and how it should be allocated. It’s your rule book – and it should always be the first thing you check.

Here’s what to look out for:

• Have there been any amendments? Make sure you’re working off the most current version.

• Vesting date: If the trust has vested or is about to, your options might be limited – the deed will usually spell out exactly what must happen next.

• Beneficiaries: Check who’s listed and what their entitlements are – income and capital entitlements aren’t always the same.

• Resolution timing: Some deeds require trustee decisions (like income distributions) to be made and documented by a certain date – often before 30 June.

• Streaming income: If you want to stream capital gains or franked dividends to specific beneficiaries, make sure your deed allows for it and that all streaming rules are met.

What About Family Trust and Interposed Entity Elections?

If you’ve made a family trust election, you’re effectively locking the trust into a specific family group. This can be a smart move to preserve losses or franking credits, but it also comes with strict rules.

Interposed entity elections are similar – they pull another entity into the family group.

But here’s the catch: if you distribute income outside that family group, the ATO can hit you with family trust distribution tax at penalty rates.  So, if these elections apply to your trust, make sure you understand the consequences before distributing any income.

Who Really Gets the Money?

The ATO is also watching for situations where income is distributed to a beneficiary “on paper,” but the actual benefit goes elsewhere. If this setup results in lower overall tax, it’s likely to raise red flags. Always ensure the person named as the beneficiary is the one who actually receives (and controls) the money.

New ATO Reporting Requirements

The ATO has also beefed up the reporting obligations for trusts:

• Trust tax returns now include more capital gains tax labels.

• Beneficiaries will need to complete a new trust income schedule to match the distributions they receive.

These changes mean it’s more important than ever to get your records and distributions right – everything needs to line up.

Final Thoughts

Trusts remain a great structure for managing and distributing income – but with that flexibility comes responsibility. If income is distributed incorrectly or outside the trust’s rules, the tax consequences can be serious.

If you’re unsure or want peace of mind, get in touch with your Client Manager. We’re here to help you stay compliant and make smart choices when it comes to trust distributions.

If you have any questions, please do not hesitate to contact your Client Manager.