If your business operates through a family trust, it’s important to stay informed about how trust distributions are taxed, especially as we approach the end of the financial year. 

The ATO continues to monitor trust distributions closely to ensure they align with tax law and are not used to avoid tax.

Here are our tips for avoiding a red flag with your family trust distributions:

Distributions Must Reflect Genuine Entitlements

When your trust makes a distribution, it must go to a beneficiary who is genuinely entitled to it, not just on paper, but in practice. If income is appointed to someone but they don’t receive the benefit (for example, if another family member retains the funds instead), this could raise red flags with the ATO.

In particular, the ATO is focusing on arrangements that attempt to divert trust income to beneficiaries on lower tax rates, while the economic benefit goes elsewhere. These arrangements may fall under anti-avoidance provisions and could lead to additional tax, interest, or penalties.

Documentation Is Key

To remain compliant, ensure your trust deed allows for the distribution you intend to make, and keep good records that demonstrate beneficiaries are receiving their entitlements.

Minutes documenting trustee decisions, bank transactions, and any formal agreements between family members should be accurate and up-to-date.

Plan Ahead

Before finalising any trust distributions for the year, speak with your accountant or tax adviser.

It’s essential to evaluate the tax implications of each distribution and determine whether your current trust structure continues to serve its intended purpose.

Family trusts remain a valuable tool for managing assets and distributing income, but they must be utilised responsibly and in accordance with the law.

If you’d like guidance on the best way to manage your trust’s distributions this year, we’re here to help.