Trust Distribution Resolutions: A Key Step to Protecting Your Tax Position

If you have a discretionary trust, then 30 June 2025 is an important date you won’t want to miss. Failing to complete your trust distribution resolution before the end of the financial year (EOFY) could see your trust taxed at the top marginal rate (up to 47%).

Below, our accountants explain what trust distribution resolutions are, why they matter and how to prepare them so you aren’t paying extra taxes.

Key Takeaways:

• Prevent the Top Marginal Tax Rate (47%)
  Completing your trust distribution resolution by 30 June 2025 ensures you won’t be taxed at the highest rate.
• Protect Your Beneficiaries
  Ensure each beneficiary is taxed at their individual marginal rate, maximising tax efficiency.
• Stay Compliant with ATO Requirements
  Proper documentation and timing help you avoid costly penalties and potential audits.

What is a Discretionary Trust?

The purpose of a trust is to separate the legal and beneficial ownership of assets. The trustee holds legal ownership, while the beneficiaries receive the income generated by those assets.

In Australia, a family trust (also known as a discretionary trust) is a type of trust where the trustee has the power to decide which beneficiaries will receive income or capital distributions and in what proportions. Unlike other trusts, beneficiaries do not have a fixed entitlement; instead, the trustee decides which beneficiaries receive distributions (and in what proportions).

Discretionary trusts are frequently used for tax planning (e.g., distributing income to beneficiaries on lower marginal tax rates) and asset protection (as assets in the trust are owned by the trustee, not the beneficiaries). However, each state or territory in Australia has its own rules, and it’s essential to comply with them to prevent unnecessary taxes.

Understanding Trust Distribution Resolutions

A trust distribution resolution is a formal decision made by the trustee that determines how the trust’s income and capital gains will be allocated among the beneficiaries. The resolution must:

• Be made before the end of the financial year (30 June).
• Be communicated to the beneficiaries of the trust.
• Be recorded in writing (dated before 30 June).

If the trustee does not make a resolution before 30 June, the trust is automatically taxed at the highest marginal tax rate (currently 47%).

However, if the trustee makes a valid resolution before 30 June, the trust can distribute the income and capital gains to the beneficiaries, who will be taxed at their individual marginal tax rate. This can result in significant tax savings for the beneficiaries and the trust.

Key Considerations When Preparing a Resolution

To make sure that your discretionary trust is set up and managed properly, it’s important to seek professional advice that is tailored to your individual circumstances.

The trustee’s decisions are recorded in the distribution resolution for each income year, which needs to be carefully prepared to deal with things like:

• How to define trust law income for this income year.
• Whether the trustee will match trust law income with taxable net income.
• Whether the trustee will decide to stream specific categories of income (capital gains, franked distributions).
• Appointing a default or balance beneficiary to handle undistributed amounts (important if you’re ever audited).

Completing Trust Distribution Resolutions Before EOFY

To make a valid trust distribution resolution, the trustee must follow specific rules:

• The resolution must be made in writing and dated before 30 June.
• The resolution must specify the amount and nature of income and capital gains to be distributed (this can be distributed in percentages rather than outright numbers).
• The resolution must be communicated to the beneficiaries of the trust (a signed copy is typical).
• The resolution must be documented in the trust’s financial records.

If these steps aren’t followed correctly, the trust may be taxed at 47% for the 30 June 2025 income year.

ATO’s Focus on Tax-Effective Distributions

The ATO continues to focus on distributions made primarily for tax benefits, particularly if the income isn’t actually paid to the beneficiary in cash. This includes distributions to adult children or related parties at a lower tax rate where the cash remains in the trust or benefits someone else.

If the ATO determines that you have made the trust distribution solely for tax-effective purposes, they will deem the distribution to be invalid and the Trust will be assessed on the amount at the highest marginal tax.

If this applies to your circumstances, speak to your accountant early to adjust your strategy.

Who Needs To Prepare Trust Distribution Resolutions?

Every discretionary trust must prepare an annual resolution, even if no income was earned that year.

Accountants are also required by the ATO to prepare the Trust Tax Return in accordance with the finalised resolution.

When Does The Trust Distribution Resolution Need To Be Prepared By?

Trust Distribution Resolutions need to be prepared and signed by 30 June 2025.  If you have an accountant, they will be legally unable to assist you with the preparation of your 2025 resolution after 30 June 2025.

What If I Don’t Complete My Trust Distribution Resolution?

Missing the 30 June deadline means no beneficiary is considered presently entitled to the trust’s income, causing the trust itself to be taxed at 47% for that financial year.

Even for trusts with minimal or no income, failing to document a resolution can lead to compliance issues down the line.

How Can Our Accountants Help You?

Completing a trust distribution resolution on time is vital to preventing extra tax charges. Our accountants are well-versed in all aspects of trust distribution resolutions, from setting up discretionary trusts correctly to preparing annual tax returns in compliance with the ATO’s requirements.

• Personalised Advice: We tailor strategies to your trust’s unique circumstances.
• Timely Preparation: We’ll ensure your resolution is ready before 30 June 2025.
• Full Compliance: We stay updated on ATO guidelines so you don’t have to.

If you’d like our assistance with your 2025 trust distribution resolution, please get in touch as soon as possible. Remember, we can only help you before 30 June 2025, once that date passes, we’re legally unable to prepare your resolution for the 2025 income year.