A trust tax return can feel more complicated than a company or individual return because it sits at the end of a wider process. Trustees need to understand the trust deed, calculate the trust’s taxable position, make valid distribution decisions and report the outcome consistently to beneficiaries and the ATO.
Getting those steps right matters. A distribution that is not authorised by the deed, not made at the required time or not properly recorded can lead to unexpected tax outcomes, disputes between beneficiaries and increased ATO scrutiny.
What a trust tax return does
A trust is not generally taxed in the same way as a company. Instead, the tax outcome commonly depends on who is entitled to the trust’s income at the end of the income year and how the income has been dealt with under the trust deed.
The trust tax return reports the trust’s income, deductions, capital gains, losses, credits and distributions. It also includes a statement showing how the trust’s income has been allocated among beneficiaries.
For many family, discretionary and unit trusts, the trustee is responsible for preparing and lodging the return. The trustee may be an individual or a company, but the trustee acts in that capacity for the trust rather than in a personal capacity.
A trust conducting a business will usually need its own tax file number and may also need an ABN, GST registration and BAS reporting, depending on its activities and turnover. The trust return remains separate from the trustee’s own income tax return and from the returns of individual beneficiaries.
Trusts can be used for a range of purposes, including:
- operating a family business
- holding investment properties or share portfolios
- managing assets for family members
- holding units in an investment structure
- administering a deceased estate
- operating under the terms of a will.
The type of trust matters. A discretionary trust, unit trust, deceased estate and testamentary trust can have very different distribution rights and tax considerations.
The trust deed comes first
Before preparing a trust tax return, the trustee should review the trust deed and any valid amendments. The deed determines the trust’s beneficiaries, the trustee’s powers, the meaning of income for trust purposes and the process for making distribution decisions.
This is important because there are two related, but different, concepts to consider:
- Trust income, sometimes called income of the trust estate, is generally determined under the trust deed and trust law.
- Taxable or net income is calculated under income tax law after taking into account assessable income, allowable deductions, tax losses and other tax adjustments.
These amounts are not always the same.
For example, a trust may have accounting income available for distribution that differs from the taxable income shown in the trust tax return. This can happen because of depreciation, tax deductions, capital gains, franking credits, prior-year losses or other tax adjustments.
The trustee should not assume that distributing “all income” without further detail will always produce the intended tax result. The wording of the deed and the distribution resolution both matter.
A sound process generally involves:
- Reading the current trust deed and all amendments.
- Confirming who can receive income and capital distributions.
- Identifying any limits on streaming capital gains or franked distributions.
- Determining how the deed defines income.
- Preparing a distribution resolution that follows the deed.
- Using the final resolution and accounts as the foundation for the tax return.
Where a trust deed is unclear, outdated or has been amended several times, obtaining advice before making distributions is often preferable to trying to correct the position after year end.
Why trustee resolutions are so important
For a discretionary trust, a trustee resolution is the formal record of how income and, where relevant, capital are appointed to beneficiaries.
The ATO’s guidance states that discretionary trustees need to make beneficiaries presently entitled to trust income by the end of the income year. In practice, this means the trustee should complete the distribution decision by 30 June, subject always to the requirements of the particular trust deed.
A written resolution is often the clearest evidence that the trustee made a valid decision. Even where a deed does not expressly require a written record, written minutes or resolutions can help demonstrate what was decided, when it was decided and which beneficiaries were intended to benefit.
The resolution should be clear enough to answer questions such as:
- Which beneficiaries received income?
- Was the distribution a fixed amount, percentage or residual share?
- Did the trustee distribute income, capital or both?
- Were specific amounts of capital gains or franked distributions dealt with separately?
- Was any income retained for a beneficiary as an unpaid present entitlement?
- Does the resolution match the authority given by the deed?
Vague or inconsistent resolutions create risk. A resolution that refers to a beneficiary who is not within the class of eligible beneficiaries, for example, may not be effective under the deed.
Capital gains and franked distributions need particular care. The tax law includes specialised rules that can preserve the character of trust capital gains in the hands of beneficiaries and allow franking credits to flow through a trust where the relevant requirements are met.
The ATO says a beneficiary’s specific entitlement to franked distributions must be recorded in writing by the end of the income year. For capital gains, the ATO’s guidance describes a later written-record period in some circumstances, but trustees still need to consider whether their deed causes a beneficiary to become entitled earlier.
Who pays tax on trust income?
The general principle is that tax is commonly assessed to beneficiaries who are presently entitled to trust income, rather than being paid by the trustee at the trust level.
Where an adult beneficiary is presently entitled and is not under a legal disability, the beneficiary’s assessable income generally includes their share of the trust’s net income under the trust taxation rules.
However, the trustee may be assessed in particular situations. These can include circumstances where:
- a beneficiary is under a legal disability, such as a minor in many cases
- no beneficiary is presently entitled to some or all of the trust income
- a beneficiary is a non-resident and special rules apply
- the trust income is affected by anti-avoidance or integrity provisions
- the trust is a deceased estate or another trust type subject to particular rules.
The trustee’s tax liability can therefore depend on much more than the amount transferred to a beneficiary’s bank account. Legal entitlement, the terms of the deed, the trustee’s decisions and the nature of the trust income all need to be considered.
A simple example
Assume a family discretionary trust runs a small business and also receives dividends and rental income. Before the end of the income year, the trustee reviews the deed and resolves to distribute ordinary income to adult beneficiaries. The trustee also records a separate decision about the treatment of franked distributions.
The trust tax return then reports the business income, rental income, deductions, dividend income, franking credits and beneficiary distribution details. Each beneficiary should receive the information needed to include the relevant trust distribution amounts in their own tax return.
The cash does not necessarily have to be paid immediately for a present entitlement to arise. However, where amounts remain unpaid, the trustee should properly record the liability to the beneficiary and consider the tax and commercial consequences of retaining or using those funds.
Information and records needed to prepare the return
Good records make trust tax compliance more manageable and provide support if the ATO asks questions later.
The income tax record-keeping rules require businesses to keep records that explain relevant transactions and allow tax liabilities to be readily ascertained. In many cases, records must be retained for at least five years, with the period potentially extending in certain circumstances.
For a typical business or investment trust, useful records include:
- the original trust deed and every amendment
- trustee appointment, retirement and corporate trustee documents
- annual trustee resolutions and distribution minutes
- financial statements, including profit and loss reports and balance sheets
- bank statements and loan account records
- sales records, invoices and expense receipts
- rental statements, property management reports and loan interest summaries
- dividend statements and managed fund annual tax statements
- records supporting deductions, depreciation and asset purchases
- capital gains tax records, including purchase and sale contracts
- details of prior-year tax losses
- beneficiary tax file number and contact information, where relevant
- records of unpaid present entitlements and payments made to beneficiaries.
Trustees should also make sure the legal ownership of assets and bank accounts matches the trust structure. Assets intended to be held by a trustee for a trust should generally be recorded in the trustee’s capacity as trustee, not simply in an individual’s personal name.
This is especially important when property, shares, business assets or loans are involved.
Common issues trustees should watch for
Trust tax returns are often straightforward where the trust has simple investment income and a clear annual resolution. Complexity rises quickly when the trust operates a business, holds property, receives capital gains, distributes to companies or has unpaid entitlements.
Some common areas requiring care include the following.
Distributions to minors
Trust distributions to minors can be subject to different tax treatment from distributions to adults. Trustees should not assume that a distribution to a child will receive the same tax outcome as a distribution to an adult beneficiary.
Capital gains
A capital gain made by a trust can carry through to beneficiaries under specialised trust capital gains tax rules. The intended beneficiary, the trust deed, the trustee resolution, available capital losses and the nature of the gain all need to be considered.
Franked dividends
A trust receiving franked dividends may be able to pass the benefit of the franked distribution and associated franking credit to beneficiaries. This requires the relevant flow-through rules to be satisfied and appropriate records to be maintained.
Corporate beneficiaries and unpaid present entitlements
Where a private company is made presently entitled to trust income but the amount remains unpaid, the arrangement should be reviewed carefully. In certain circumstances, use of those funds for the benefit of a shareholder or associate can have Division 7A consequences.
Reimbursement arrangements
A distribution should provide a genuine benefit to the beneficiary named in the trustee resolution. Arrangements where income is appointed to one person but another person receives the economic benefit may attract the trust reimbursement agreement rules.
The ATO’s published ruling explains that these rules may apply where a beneficiary’s entitlement is connected with an agreement that benefits another person and has a tax reduction purpose, unless an ordinary dealing exception applies.
Inconsistent paperwork
A common practical problem is where the tax return, financial accounts, trustee resolution and beneficiary statements do not agree. These documents should be prepared as part of one coordinated process rather than in isolation.
A practical process for trustees at year end
Trustees can reduce pressure at EOFY by starting the process before the final days of June.
A practical checklist is:
- Review the trust deed early. Confirm beneficiaries, trustee powers and the definition of trust income.
- Update the accounts. Obtain current profit figures, investment income details, property records and estimated deductions.
- Identify unusual transactions. Consider asset sales, capital gains, loans, dividends, new beneficiaries, company beneficiaries and unpaid amounts.
- Discuss the intended distribution. Consider commercial needs as well as tax outcomes.
- Prepare and sign the trustee resolution on time. Follow the deed and ensure the wording reflects the intended distribution.
- Finalise the accounts and trust tax return. Make sure they agree with the resolution.
- Provide beneficiaries with reliable tax information. Beneficiaries need accurate distribution details to complete their own returns.
- Retain the supporting records. Keep the deed, resolution, accounts, tax return and source documents together.
A trust can be an effective structure for holding investments or operating a business, but its tax administration depends on disciplined annual governance. The trust tax return is not simply a form to complete after 30 June. It is the final reporting step in a process that begins with the deed and ends with accurate beneficiary reporting.
Getting the trust return right
Trust tax returns require careful coordination between the trust deed, trustee decisions, accounting records and tax rules. The most important takeaway is to make distribution decisions correctly and on time, then ensure the tax return reflects those decisions.
This article is general information only and is not personal financial or tax advice. Trust taxation can turn on the wording of a particular deed and the circumstances of each beneficiary. Speak with a registered tax agent or accountant, such as, for advice tailored to your trust and its intended distributions.