How are trust distributions taxed in Australia?
Trust distributions are generally taxed in the hands of the beneficiaries who are presently entitled to the income, at their individual marginal tax rates. If income is retained by the trust, it is usually taxed at the top marginal tax rate.
Was this helpful?
14 readers found this helpful
14 readers found this helpful
How it works in practice
How Trust Distributions Work
In Australia, trusts are generally treated as "flow-through" entities for tax purposes. This means the trust itself is not typically taxed on the income it earns, provided that income is distributed to beneficiaries who are presently entitled to it. Instead, the income is attributed to and taxed in the hands of the beneficiaries.
Taxation of Beneficiaries
Beneficiaries receive their share of the trust's net income, which they then declare in their individual tax returns. The tax rate applied depends on the beneficiary's own tax status. For example, an individual beneficiary will pay tax at their marginal income tax rate, while a company beneficiary will pay company tax rates. If a beneficiary is a non-resident, specific non-resident tax rates apply to their Australian-sourced income.
Retained Income
If the trust income is not distributed and remains within the trust (i.e., no beneficiary is presently entitled to it), that undistributed income is typically taxed within the trust at the highest marginal tax rate, plus the Medicare levy. This high tax rate encourages trusts to distribute their income annually.
Important exceptions
Minors who receive distributions may be taxed at penalty rates unless they meet specific criteria, such as receiving income from employment or a deceased estate. Discretionary trusts offer flexibility in income distribution, which can impact tax outcomes, but must adhere strictly to trust deed provisions. The treatment of franked dividends, capital gains, and certain types of distributions (e.g., to non-residents) also involves specific rules and may require professional advice.
What you should do now
-
Understand your trust deed: Familiarise yourself with the specific terms of your trust deed, as it dictates how income can be distributed.
-
Determine beneficiaries' present entitlement: Ensure beneficiaries are formally made presently entitled to trust income by year-end to avoid the trust being taxed at the highest rate.
-
Issue beneficiary statements: Provide each beneficiary with a statement detailing their share of the trust's net income for tax reporting purposes.
-
Lodge trust tax return: Complete and lodge the trust's annual tax return (Form T) with the ATO, even if no tax is payable by the trust itself.
-
Seek professional advice: Consult with a qualified tax accountant or financial advisor to navigate complex trust tax rules and optimise distributions.
Expert Notes
No expert notes have been added to this question yet.
People also asked
Explore highly relevant questions and get instant verified short answers.