A Guide to the Tax Treatment of Trusts in 2026

It’s a great question. At EndureGo Tax, we see business owners and investors across Sydney, from Ashfield to the Northern Beaches, grapple with this.

The answer is simpler than you might think, and it all comes down to one core idea.

How the Tax Treatment of Trusts Really Works

To begin with, let’s cut through the accounting jargon and focus on what really matters—the ‘flow-through’ principle.

Instead of treating your trust as a separate taxpayer like a company, think of it as a funnel or pipeline. It collects income from your business or investments and then channels that income directly to your chosen beneficiaries.

As a result, this ‘flow-through’ approach makes trusts—especially family trusts—highly flexible for tax planning. Rather than taxing the income within the trust, the income flows through to the beneficiaries, who then pay tax based on their individual tax rates.

The Flow-Through Principle in Action

Imagine your family trust made a $100,000 profit this financial year. Instead of the trust copping a tax bill, the trustee gets to decide how that profit is split among the family.

Here’s a practical example:

• You distribute $40,000 to your spouse, who isn’t working and is in a low tax bracket.
• You give $20,000 to your adult son at university, who has no other income.
• The remaining $40,000 is distributed to you.

The result? Each person pays tax only on the portion they received, at their own marginal tax rate. By strategically distributing the income to family members on lower tax rates, the family’s overall tax bill can be massively reduced. It’s a completely different ball game compared to one person receiving the full $100,000 and paying tax at a much higher rate.

This isn’t some clever loophole; it’s a foundational concept in our tax system, laid out in Division 6 of the Income Tax Assessment Act 1936. The law specifies that if a beneficiary is ‘presently entitled’ to a share of the trust’s income, they are the one responsible for the tax on it, not the trust itself.

To make this even clearer, here’s a quick summary of the core principles at play for different trusts.

Core Principles of Australian Trust Taxation

This table shows why staying on top of your trust’s administration isn’t just good practice—it’s essential for avoiding nasty surprises from the ATO.

What Happens if Income Isn’t Distributed?

However, this is where things can go seriously wrong—and it’s a trap we see trustees fall into all the time.

If you fail to distribute all the trust’s income to beneficiaries by the 30 June deadline, any leftover income becomes “accumulated.” As a result, the ATO applies tax to this undistributed income at the highest marginal rate—currently 47% (including the Medicare levy).

Because of this, the harsh tax rate exists to prevent trustees from holding onto profits within the trust indefinitely.

Therefore, smart trust management goes beyond simply finding tax savings. It also requires a clear, reliable process to avoid costly mistakes. By getting these fundamentals right, you take the first step toward making your trust work for you—not against you.

So, are you ready to ensure your trust is structured for maximum tax efficiency and aligned with the Tax Treatment of Trusts? Our team of expert accountants can review your setup and provide tailored advice. Book a consultation with EndureGo Tax today and gain peace of mind.

Choosing the Right Trust Structure for Your Goals

Choosing the right trust isn’t just a simple box-ticking exercise. For savvy business owners, tradies, and investors across Australia, it represents one of the most important decisions you will make for your financial future. After all, the structure you select directly affects everything from asset protection to your overall tax obligations.

To put it another way, think of selecting a trust like choosing the right vehicle for a job. You wouldn’t use a sports car to haul tools and materials, right? The same principle applies here. Therefore, let’s break down the main options you’ll encounter so you can confidently pick the trust that best aligns with your goals and the Tax Treatment of Trusts.

The Discretionary Trust or Family Trust

The discretionary trust, often referred to as a family trust, serves as the ultimate workhorse in Australian tax planning. Its standout feature? Flexibility.

Here, the trustee holds the power—or discretion—to decide which beneficiaries receive income or capital from the trust and in what amounts each financial year. This isn’t fixed; it can change annually depending on your family’s circumstances.

Consequently, this trust becomes an excellent tool for families running a business or managing an investment portfolio. Why? Because it allows you to stream income to family members on lower tax brackets, effectively reducing the family’s overall tax bill—making it a powerful strategy for tax minimisation.

Practical Example: The Ashfield Tradie

• Mark, a successful plumber from Ashfield, runs his business through a discretionary trust.
• This year, the business turned a profit of $180,000.
• Mark’s wife, Sarah, works part-time with a low income. Their son, Tom, is 19 and at uni, earning nothing.
• The trustee decides to distribute $80,000 to Sarah and $20,000 to Tom. Mark takes the remaining $80,000. By doing this, they’ve split the tax hit across three people instead of just one, saving a bundle in tax.

This flowchart shows how income flows from a trust to a beneficiary, and who ends up paying the tax.

As you can see, the trust itself doesn’t pay tax on distributed income. It acts more like a funnel, passing the income and the tax liability straight to the beneficiaries.

The Unit Trust

Where a family trust is flexible, a unit trust is rigid and predictable. Beneficiaries, called unitholders, have a fixed right to the trust’s income and capital. It’s all based on how many “units” they own.

It’s a lot like owning shares in a company. If you hold 25% of the units, you get 25% of the profits. Simple as that.

This fixed setup makes unit trusts the go-to choice when unrelated people team up for an investment, like a property development project. There’s no room for the trustee to play favourites—everyone’s entitlement is locked in from the start.

Under the Income Tax Assessment Act 1997, a unit trust’s income is taxed in the hands of the unitholders based on their fixed interests. This gives investors the certainty they need, knowing exactly what their slice of the pie will be.

The Testamentary Trust

Now, a testamentary trust is a bit different. It’s not something you set up while you’re alive. Instead, it’s created through your Will and only kicks into gear after you pass away.

It’s an incredibly powerful estate planning tool, allowing you to pass on assets to your loved ones inside a protective, tax-friendly structure.

One of its biggest perks is how it handles distributions to kids under 18. Normally, if a family trust distributes income to a minor, it gets taxed at the highest marginal rate. It’s brutal.

But income from a testamentary trust is different. It can be distributed to children, who are then taxed at standard adult marginal tax rates. This is a game-changer, creating massive tax savings on income used for a child’s education and general upbringing. If you want to dive deeper into structures, check out our guide on choosing between a family trust vs a company.

Practical Example: The Northern Beaches Investor

• An investor from the Northern Beaches passes away, leaving her $2 million share portfolio in a testamentary trust for her two young grandchildren.
• The portfolio generates $80,000 in dividends each year.
• The trustee can distribute $40,000 to each grandchild. Because of the special rules for testamentary trusts, each child can use their own tax-free threshold and pay tax at normal adult rates, a fantastic tax effective outcome.

Getting the right trust structure from day one is fundamental to smart financial management. Each has its own strengths and is designed for different situations.

Is your current trust structure truly working for you? An expert review could uncover huge opportunities for better asset protection and tax savings. Book a no-obligation consultation with the EndureGo Tax team and let’s make sure your structure is fit for purpose.

Your Responsibilities as a Trustee

Being named a trustee for a family trust is a massive responsibility. It’s not just a title you can pop on your LinkedIn profile; you’re now legally and financially accountable for managing the trust’s assets.

Your number one job? To always act in the best interests of the beneficiaries. Getting this wrong isn’t just a simple mistake—it can lead to serious legal battles and painful tax bills from the ATO.

Think of yourself as the guardian of the trust’s money. It’s your duty to make smart decisions and ensure the income gets to the right people (the beneficiaries) without any expensive detours. Here’s what you absolutely need to know to do the job right.

The Hard Deadline: 30 June

One of your most critical jobs as the trustee of a discretionary trust is making a formal trustee resolution. This isn’t a suggestion; it’s a non-negotiable deadline you must meet on or before 30 June every single year.

This resolution is the official document where you decide which beneficiaries get what slice of the trust’s income for the financial year. Once you make this call, you create what the tax world calls a ‘present entitlement’. Put simply, you’ve legally promised that income to a specific person, making them responsible for paying the tax on it.

A valid trustee resolution is your golden ticket to making the trust tax-effective. Miss that 30 June deadline, and any income left undistributed gets absolutely smashed by penalty tax. Under the rules in Section 99A of the Income Tax Assessment Act 1936, that income is taxed at the highest individual marginal rate—a whopping 47%.

The Smart Play: Understanding Income Streaming

As a trustee, you have a powerful strategy up your sleeve called income streaming. This lets you carve up the trust’s income and direct different types of income to different beneficiaries. It’s about being clever, not just splitting profits down the middle.

This is where family trusts really shine, which is why they’re so popular with Aussie businesses and investors. The ATO has reported over a million discretionary trusts lodging tax returns in recent years. The main drawcard is this exact flexibility, which can slash a family’s overall tax bill. For a bit more background, you can explore a short primer on trust taxation.

So, what does this look like in real life?

Practical Example of Income Streaming

Let’s say your family trust earned two kinds of income this year:

• A $20,000 capital gain from selling shares.
• $10,000 in fully franked dividends from an ASX-listed company.

You have two beneficiaries in the family:

1. Your Spouse: Already on a high tax bracket but can use franking credits to offset their other tax.
2. Your Uni-Student Child: Has no other income, so they have the full tax-free threshold available.

A rookie move would be to just split the total $30,000 income 50/50. Here’s the smart play using income streaming:

• You stream the $20,000 capital gain to your child. After applying the 50% CGT discount, their taxable income is only $10,000. This falls neatly within their tax-free threshold, meaning $0 tax is paid on it.
• You stream the $10,000 in franked dividends to your spouse. They can use the attached franking credits to reduce the tax they owe on their salary.

By doing this, you’ve legally minimised the family’s total tax bill—far more effectively than a simple 50/50 split. This is a perfect example of a trustee acting in the best financial interests of the beneficiaries.

Fulfilling your duties as a trustee takes careful planning and a solid grasp of the rules. That 30 June deadline is absolute, and the cost of getting your distributions wrong is severe.

Are you confident in your trustee resolutions and distribution strategy? A small oversight can lead to a large, unexpected tax bill. Contact EndureGo Tax for an expert review of your trust’s compliance and ensure your duties are being met effectively.

Capital Gains and Your Trust: A Tax-Saving Powerhouse

If you’re an investor or business owner in Australia, especially in a booming market like Sydney, Capital Gains Tax (CGT) is always on your mind. Selling a valuable asset? That tax bill can feel like a punch to the gut.

But here’s the thing: if that asset is held in a trust, you’ve got a massive advantage. Trusts offer some seriously powerful ways to manage, minimise, and even defer CGT that just aren’t available to individuals.

One of the best tools in the entire tax system is the 50% CGT discount. It’s a game-changer.

If your trust holds an asset—think an investment property, a business, or a parcel of shares—for more than 12 months, the ATO lets you cut the taxable capital gain in half. Instantly.

The Magic of the 50% CGT Discount in a Trust

Now, this is where it gets really clever. The trust itself doesn’t just grab the discount and pay tax on what’s left. Instead, the real magic happens when that discounted gain is passed on to a beneficiary.

The trust calculates the gain, slashes it in half with the discount, and then streams that smaller, more manageable amount to a beneficiary. That person then includes it in their own tax return and pays tax at their marginal rate.

This isn’t some niche loophole; it’s a core feature of how trusts work in Australia. We’re talking big numbers. ATO data shows that trusts help investors slash their taxable gains by tens of billions of dollars each year using this very discount. For tradies selling off old equipment or small business owners exiting an investment, it’s a lifesaver.

Let’s look at a real-world scenario.

Practical Example of a CGT Distribution from a Trust

Imagine your family trust sells an investment property on the Northern Beaches that it’s held for five years, making a gross capital gain of $200,000. The trustee’s next move is critical.

Here’s how a smart decision vs. a poor one (or no decision) can make tens of thousands of dollars of difference.

The numbers don’t lie. Simply by directing the gain to a family member with a lower income, the family saves a massive $25,000 in tax compared to giving it to a high-income earner.

And the worst-case scenario? Leaving the money in the trust. If the income isn’t distributed, you don’t just lose the 50% CGT discount—the trust gets taxed at the highest possible penalty rate of 47%. Ouch.

Want to get a better handle on the sums? You can read our detailed guide on how to calculate capital gains tax.

Need to Restructure? Defer Tax with CGT Rollover Relief

Beyond the 50% discount, trusts offer another powerful tool: CGT rollover relief. This is a more advanced strategy, but it’s crucial for growing businesses.

It allows you to defer paying CGT when specific events happen, like restructuring your business.

For example, say you’ve been operating as a sole trader and decide it’s time to move into a more formal trust structure. Rollover relief might let you transfer assets like your business premises or valuable equipment into the new trust without triggering a CGT bill right now.

The tax isn’t wiped out, but it’s ‘rolled over’ and deferred until the trust eventually sells the asset down the track. This is all laid out in Subdivision 122-A of the Income Tax Assessment Act 1997.

CGT rollover provisions are a lifeline for growing businesses. They let you adapt and evolve your structure without being punished by a massive, premature tax bill. It stops tax from becoming a roadblock to your business’s growth.

While the Aussie rules are unique, you can get a sense of how other tax systems handle this by understanding IRS Schedule D instructions for capital gains.

Getting CGT right is a cornerstone of smart trust management. The combination of the 50% discount and strategic distributions to beneficiaries can make a huge difference to your net returns.

Are you planning to sell a major asset held in your trust? Don’t get stung by a surprise tax bill that could have been avoided. Book a CGT planning session with EndureGo Tax today and let’s structure the sale for the best possible outcome.

Using Franked Dividends for Tax Efficiency

If your trust holds Australian shares, you’ve probably heard the term franked dividends. But let’s be real – they’re more than just income. They are one of the most powerful tax-saving tools you can have in your corner.

It’s all thanks to Australia’s unique imputation system, which is designed to stop company profits from being taxed twice (once at the company level and again in your hands).

Think of it like this: when an Australian company pays tax on its profits, it can attach a credit for that tax to the dividends it pays out. That little bonus is called a franking credit. When your trust gets a fully franked dividend, it’s like the company has already made a tax pre-payment for you.

But the real magic happens when that dividend is passed on to a beneficiary. This is where a family trust can seriously shine.

How Franking Credits Can Lead to Tax Refunds

Here’s the strategy in a nutshell: stream fully franked dividends to a beneficiary who is on a low or zero marginal tax rate.

Because the tax has already been paid at the corporate rate of 30%, a beneficiary with little or no other income can use those franking credits to wipe out their tax bill—and often, get a cash refund from the ATO.

This is a go-to strategy for family trusts and SMSFs with share portfolios. The numbers don’t lie. ATO statistics show that trusts receive tens of billions of dollars in franked dividends each year, carrying billions more in attached credits. That’s a huge amount of tax value being passed on.

Franking credits are refundable. This is the key takeaway. If the tax credits on your dividends are worth more than the tax you owe, the ATO doesn’t just pocket the difference. They pay it back to you in cash. It’s a massive advantage of the Australian tax system.

A Practical Example: Streaming Franked Dividends

Let’s imagine your family trust gets a $7,000 fully franked dividend from its BHP shares. The dividend statement shows it also comes with $3,000 in franking credits (calculated as $7,000 / 0.7 × 0.3).

The trustee decides to stream this income to an adult child, Alex, who’s at uni and has no other income for the year. Here’s how it plays out for Alex:

1. Assessable Income: Alex has to declare the full “grossed-up” dividend. That’s the cash dividend plus the franking credits ($7,000 + $3,000 = $10,000).
2. Tax Calculation: Since Alex’s total income is $10,000, he’s well under the tax-free threshold (currently $18,200). His tax liability is $0.
3. The Refund: Alex still has those $3,000 in franking credits. Since he owes no tax, he claims the full amount as a cash refund directly from the ATO.

The result? The family effectively gets $10,000 of value—the $7,000 cash dividend plus a $3,000 tax refund—entirely tax-free. You can learn more about how franking credits work in our detailed guide.

This is a perfect illustration of how trusts, when used smartly with Australia’s imputation system, can create brilliant tax outcomes.

For any trust holding Aussie shares, getting this right is non-negotiable. If you’re not making the most of franking credits, you could be leaving thousands of dollars on the table every year.

Book a tax planning session with EndureGo Tax today and let’s make sure your trust is squeezing every last dollar of value from the credits it receives.

Common Trust Mistakes and ATO Red Flags

Knowing the rules for trust tax is one thing. Knowing where the landmines are is another entirely.

While trusts are fantastic tools for asset protection and tax planning, even simple mistakes can attract unwanted attention from the Australian Taxation Office (ATO). An audit is stressful, expensive, and something you definitely want to avoid.

The best way to steer clear of trouble is to understand what the ATO is looking for. Let’s walk through the common pitfalls we see every day, so you can make sure your trust is compliant and audit-proof.

Here are the key red flags that have the ATO seeing, well, red.

Invalid or Late Trustee Resolutions

This is the number one mistake we see, year after year. As a trustee, you have a hard deadline of 30 June to create a legally binding resolution that spells out exactly how the trust’s income for the year will be distributed.

A quick chat, a verbal agreement, or a document you “backdate” in July just won’t fly. If your resolution is late, invalid, or simply doesn’t exist, the ATO’s position is clear: no beneficiaries were entitled to the income.

The result? The trustee gets slapped with a tax bill on that income at the highest marginal rate of 47%. Ouch.

The ATO Crackdown on Section 100A

The ATO is laser-focused on arrangements that fall foul of Section 100A. This rule targets what the tax office calls “reimbursement agreements,” which sound complicated but are actually quite simple in practice.

A Section 100A red flag goes up when:

• On paper, the trustee distributes income to a beneficiary in a low tax bracket (like an adult child at uni or a related company).
• In reality, the actual cash or benefit ends up in the hands of someone else (usually the high-income person running the trust).

The ATO sees this for what it is: a scheme to sidestep tax. If they apply Section 100A, the distribution is cancelled, and the trustee is assessed tax at the top marginal rate. You can read the ATO’s detailed view on Section 100A reimbursement agreements for more insight.

Expert Insight: The days of “paper distributions” are well and truly over. The ATO’s data-matching is getting smarter. It’s now critical that the money leaving the trust’s bank account actually goes to the beneficiaries listed in your resolution. Any disconnect is a massive audit trigger.

Other Critical Red Flags to Avoid

Beyond resolutions and Section 100A, a few other common errors can put your trust squarely in the ATO’s sights. Keep an eye out for these:

• Outdated Trust Deed: Your trust deed is its constitution. If it hasn’t been reviewed and updated to reflect modern tax law, you might find it doesn’t allow for things like effective income streaming or managing capital gains, leading to a terrible tax outcome.
• “Loans” to Beneficiaries That Aren’t Really Loans: If the trust “lends” money to a beneficiary but there’s no proper loan agreement, no interest charged, and no repayments made, the ATO can argue it was a distribution in disguise. This can cause all sorts of compliance headaches.
• Accidentally Triggering Division 7A: This is a big one. When a trust lends money or gives assets to a beneficiary that is a private company, you risk tripping over a complex set of rules called Division 7A. Getting this wrong can result in the loan being treated as an unfranked dividend, creating a huge, unexpected tax bill for the company.

Navigating these risks is the difference between a trust that works for you and one that creates a tax nightmare. Peace of mind comes from knowing your structure is buttoned up, compliant, and ready for scrutiny.

If any of these red flags sound a little too familiar, it’s a clear sign you need a professional to take a look under the hood. Book a confidential consultation with EndureGo Tax today, and let our experts make sure your trust is secure.

Your Top Questions About Trust Taxation

Trusts can feel like a maze of rules and paperwork, especially when it comes to tax. It’s no wonder we get a lot of questions.

We’ve pulled together the most common queries our clients ask, with straight-up answers to give you some clarity and confidence. Let’s dive in.

Does a Trust Lodge a Tax Return if It Makes No Income?

Yes, almost always. This is a big one that catches a lot of people out.

Even if your trust made zero income for the year—or even made a loss—you still need to lodge a tax return with the ATO.

Think of it as a mandatory check-in. The ATO needs that lodgement to track the trust’s financial pulse and, just as importantly, to officially record any losses you can use to reduce tax in future profitable years. Skipping this is a major red flag for an audit and can lead to penalties.

Can I Distribute Trust Income to My Children Under 18?

Technically, yes. But you need to be extremely careful here.

There are special penalty tax rates that kick in for most types of trust income paid to minors (kids under 18) once it goes over a tiny threshold—currently just $416 a year.

These penalty rates can jump straight to the highest marginal rate of 47%. It’s a nasty surprise that can create a shocking tax bill out of nowhere. The main exception is income from a testamentary trust, which plays by a different, more favourable set of rules for minors. Always get expert advice before distributing to your kids to avoid this very expensive trap.

What Is the Difference Between Trust Income and Taxable Income?

This is probably the most crucial distinction to get right, and it trips up trustees all the time. The two terms sound similar, but they mean very different things. Getting them mixed up is a recipe for disaster.

• Trust Income: This is the profit figured out based on the rules in your trust’s rulebook—the trust deed. It’s the pot of money the trustee actually has the power to distribute to beneficiaries.
• Net Taxable Income: This is the profit calculated according to Australian tax law (like the Income Tax Assessment Act 1997). This is the figure the ATO uses to work out how much tax your beneficiaries will pay.

Here’s the problem: if your trust deed isn’t drafted perfectly, its definition of “income” can be completely different from the ATO’s. This mismatch can lead to beneficiaries being taxed on money they never received, or worse, income getting stuck in the trust and being taxed at the highest penalty rates.

When facing complicated questions about your trust deed or tax law, you need the right tools. For interpreting dense legal documents, an AI legal assistant can help you quickly find the clauses you’re looking for.

Book a consultation with EndureGo Tax today.