Trust Distributions and Tax Planning 2026

Family trusts remain the most popular business structure for Australian SMEs — and for good reason. They offer asset protection and income-splitting flexibility that sole traders and companies can't match. But in 2026, the ATO is scrutinising trust distributions more closely than ever. Here's how to stay compliant while minimising your family's tax bill.

1. How Trust Distributions Work

A discretionary (family) trust doesn't pay tax itself. Instead, the trustee decides how to distribute the trust's net income each year to beneficiaries — typically family members, companies, or other trusts. Each beneficiary then pays tax on their share at their own marginal rate.

The key advantage: you can direct income to family members in lower tax brackets (e.g., an adult child earning $18,200 or less pays zero tax on their share).

2. The 30 June Deadline

Trust distribution resolutions must be made by 30 June each year. If the trustee doesn't make a resolution by this date:

• The income may be assessed to the trustee at the top marginal rate (47%).
• The default beneficiary (if one exists in the trust deed) receives the income — which may not be the tax-optimal outcome.

We prepare distribution minutes for all our trust clients in June to ensure this deadline is never missed.

3. Streaming Capital Gains and Franked Dividends

Trusts can "stream" specific types of income to particular beneficiaries:

• Capital gains can be streamed to individuals to access the 50% CGT discount (companies don't get this discount).
• Franked dividends can be streamed to beneficiaries who can best use the franking credits (e.g., a low-income family member).

However, the trust deed must specifically allow streaming. Older trust deeds may not include this power — we recommend reviewing your deed if it was drafted before 2010.

4. Section 100A: The ATO's Weapon

Section 100A is the ATO's anti-avoidance rule for trusts. It targets "reimbursement agreements" — situations where income is distributed to one person on paper, but the economic benefit goes to someone else. For example:

• Distributing $50,000 to your adult child, but the child "lends" the money back to you interest-free.
• Distributing to a low-income spouse who doesn't actually receive or control the funds.

If the ATO applies Section 100A, the income is taxed to the trustee at 47%. The ATO released updated guidance in 2022, and in 2026 is actively auditing arrangements that look like circular flows.

5. Distributing to a Company ("Bucket Company")

A common strategy is to distribute excess trust income to a related company (known as a "bucket company") to cap the tax rate at 25% (for base rate entities) instead of an individual's marginal rate of up to 47%.

However, the retained profits in the bucket company trigger Division 7A if you later try to access those funds personally. The money is effectively "locked" in the company until distributed as a dividend.

6. Practical Tips for 2026

• Review your trust deed — ensure it allows streaming and has appropriate powers.
• Document everything — distribution minutes, beneficiary acknowledgments, and actual payments.
• Ensure beneficiaries genuinely receive their distribution — even if it's deposited into a joint account, keep records.
• Don't distribute to minors — unearned income for under-18s is taxed at penalty rates (up to 66%).
• Consider the Medicare levy surcharge — trust distributions count as income for surcharge purposes. A $30,000 distribution could push someone over the $93,000 threshold.