Things to know about your Trust
Sally Preston
Many business and investment structures include trusts. They can be flexible and commercially useful, but they are also document-driven and easy to misunderstand. A trust is not simply a bank account or a tax distribution tool. The trust deed, trustee decisions and annual resolutions matter.
What is a trust?
A trust is a relationship where a trustee holds property for the benefit of beneficiaries. For legal purposes, the trustee owns the assets. For tax administration, the trust is generally treated as a taxpayer.
A trust is not a separate legal person in the same way as a company. This means the trustee is the person or entity that enters into contracts, owns assets and makes decisions for the trust. If the trustee is a company, the directors of that company make those decisions.
For tax purposes, the trustee lodges a trust tax return. In many cases, the beneficiaries pay tax on their share of the trust’s net income, but the trustee can be assessed in some circumstances, including where no beneficiary is presently entitled to trust income.
Key roles and documents
· Trustee – controls the day-to-day administration and must act according to the deed and law
· Appointor – may have power to remove and replace the trustee
· Beneficiaries – persons or entities who may benefit under the trust
· Trust deed – the governing document that sets out powers, beneficiaries and distribution rules
· Annual resolutions – document how income and capital are distributed each year
The trust deed is critical. It usually identifies the trustee, beneficiaries and appointor, sets out the trustee’s powers, explains how income and capital can be distributed, and may contain special rules for capital gains, franked distributions, streaming, vesting and amendment of the deed.
The deed should also be checked to understand how “income of the trust estate” is defined and whether the trustee has power to determine or characterise income. This matters because trust law income and taxable income are not always the same.
Discretionary trusts
A discretionary trust gives the trustee discretion to decide which beneficiaries receive income or capital, and in what proportions, subject to the terms of the trust deed. This flexibility is why discretionary trusts are commonly used in family business and investment groups.
The flexibility is useful, but it also means the trustee must make valid decisions each year. Beneficiaries generally do not own a fixed share of the trust assets and cannot simply sell their “interest” in the trust in the same way a shareholder can sell shares in a company.
Fixed and unit trusts
A fixed trust, including many unit trusts, gives beneficiaries or unit holders a fixed entitlement to income and/or capital. Units in a unit trust are usually transferable, subject to the trust deed and any unitholders agreement.
A fixed or unit trust can work well where unrelated parties are investing together because each party’s interest is more clearly defined. However, the structure still requires annual administration, trustee resolutions and careful review of the deed.
Annual trust distributions
Trustees should review the deed before preparing income distribution resolutions. The resolution should be made by the required date, identify the beneficiaries, specify the amounts or proportions and deal properly with classes of income where the deed allows streaming. If a resolution is ineffective, another beneficiary or the trustee may instead be assessed on the relevant share of the trust’s net income, and trustee assessment may be at the top marginal rate.
Trusts are often described as “flow-through” entities because income can retain its character as it flows through to beneficiaries. For example, a franked dividend received by a trust may be distributed to a beneficiary as a franked distribution, and a capital gain may retain its character as a capital gain, subject to the deed and tax rules.
Section 100A: reimbursement agreement risk
Section 100A can apply where a beneficiary is made presently entitled to trust income but another person receives the benefit, and the arrangement has a tax reduction purpose. If section 100A applies, the trustee can be taxed at the top marginal rate.
The ATO’s PCG 2022/2 sets out its compliance approach to section 100A arrangements, including green-zone and red-zone examples. This is particularly relevant for distributions to adult children, loss entities and arrangements where funds are returned to, lent to or used by someone other than the beneficiary. The ATO has indicated that PCG 2022/2 is being reviewed following Bendel, so arrangements should be considered carefully rather than assumed to be low risk.
Corporate beneficiaries and Bendel
The High Court’s 2026 decision in Bendel confirmed that a corporate beneficiary’s unpaid present entitlement is not, by itself, a Division 7A loan merely because the company has not called for payment of the entitlement. However, this does not remove all risk. Subdivision EA, section 100A and wider integrity issues may still need to be considered, particularly where trust funds are used by other entities in the group.
Family trust elections
A family trust election can be useful for accessing certain tax concessions, including trust loss and franking credit outcomes. However, once an election is in place, distributions outside the relevant family group can trigger family trust distribution tax at the top marginal rate.
Advantages and disadvantages
Discretionary trusts
Advantages
· Provides flexibility in how income and capital are distributed between beneficiaries, subject to the trust deed.
· May allow different types of income, such as capital gains and franked distributions, to be streamed to particular beneficiaries where the deed and tax rules allow.
· May provide asset protection benefits for potential beneficiaries, depending on the structure and circumstances.
· Can access the general 50% CGT discount where the relevant conditions are met.
Disadvantages
· Requires valid trustee decisions and annual distribution resolutions.
· Beneficiaries do not have fixed transferable interests in the trust assets.
· Can be difficult for business owners to understand and administer correctly.
· Distributions need to be reviewed carefully for section 100A, family trust election and other tax issues.
Fixed or unit trusts
Advantages
· Provides clearer fixed entitlements to income and capital.
· Units may be transferable, subject to the deed and any unitholders agreement.
· Can be useful where unrelated parties want to invest together.
· Can access the general 50% CGT discount where the relevant conditions are met.
Disadvantages
· Usually provides less distribution flexibility than a discretionary trust.
· Trust losses are generally trapped in the trust and cannot be distributed to unit holders.
· Unit transfers may have tax, duty and commercial consequences.
· Non-assessable payments may reduce unit cost bases and can trigger CGT event E4.
Example 1: discretionary trust as shareholder of a trading company
A business owner may hold shares in a trading company through a discretionary trust. If the company pays dividends to the trust, the trustee may have flexibility to distribute that income among eligible beneficiaries, subject to the deed, tax rules, section 100A, family trust election issues and the beneficiaries’ circumstances.
If the shares are later sold, the trust may also be able to access the general 50% CGT discount, provided the relevant conditions are met. The benefit of this structure depends on the trust deed, the shareholders agreement, the family group and how distributions are actually dealt with.
Example 2: unit trust for co-owned investment properties
A unit trust may be useful where several unrelated parties want to acquire investment properties together. Each investor can hold units that represent their fixed interest in the trust, and the trust deed can set out how income and capital are shared.
If one investor wants to exit, they may be able to transfer their units rather than requiring each underlying property to be transferred. However, the unit trust may still need to manage losses, unit transfers, CGT event E4 issues and annual distribution resolutions.
Practical trustee checklist
☐ Locate and review the current signed trust deed and variations
☐ Confirm trustee and appointor details
☐ Check whether a family trust election or interposed entity election exists
☐ Confirm who is within the family group before making distributions where a family trust election exists
☐ Prepare distribution resolutions before the required date
☐ Record how unpaid entitlements will be dealt with
☐ Review adult child distributions for section 100A risk
☐ Review corporate beneficiary entitlements after Bendel
☐ Keep records showing commercial or family reasons for arrangements
Need help?
Smart Solutions Tax Advisory can assist with reviewing trust deeds, distribution resolutions, family trust elections, section 100A risk and corporate beneficiary arrangements.
If you are a trustee, appointor or beneficiary and are unsure how your trust operates, it is worth reviewing the deed and current distribution practices before 30 June each year.
Disclaimer: This article contains general information only and should not be relied on as tax or legal advice.
References / Useful links
ATO PCG 2022/2: PCG 2022/2 | Legal database
ATO s100A overview: Trust taxation – reimbursement agreement | Australian Taxation Office
ATO Bendel DIS: Bendel case – Decision impact statement (DIS) | Australian Taxation Office