How business trusts are taxed in Australia, who pays and when

Many Australian small businesses and family enterprises operate through a trust, drawn by the flexibility, asset protection and succession planning it offers. At tax time, though, the structure confuses a lot of owners, because the trust itself is not taxed the way a company is. The income tax on trust income is generally collected from the people entitled to that income, and only in specific situations from the trustee.

The framework that produces this result is Division 6 of Part III of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), a scheme that has sat at the centre of Australian trust taxation for decades. This guide explains how it actually operates, step by step: how the trust's taxable income is worked out, how a beneficiary becomes entitled to it, who ends up paying the tax, and where the traps are. It matters most in the weeks before 30 June, because the decisions made by then determine the tax bill for the whole year.

Who does what at tax time

A handful of players carry the trust taxation scheme, and each has a different job.

Trustee: the legal owner of the trust property who runs the business or holds the assets. The trustee lodges the trust's tax return, decides who receives the income, and in some situations is personally assessed and must pay the tax.
Beneficiaries: the people or companies entitled to receive income from the trust. They pay tax on their share of the trust's income at their own rates, much as if they had earned the income directly.
Australian Taxation Office (ATO): administers the rules, expects the trustee's decisions to be documented properly and on time, and assesses the beneficiaries or the trustee depending on what was actually done.
Accountant or tax agent: prepares the trust tax return, forecasts the year's profit before 30 June and advises on which beneficiaries should receive what.
Lawyer: drafts and reviews the trust deed and trustee resolutions, and checks whether the deed actually gives the trustee the powers the plan relies on.

Step one: work out the trust's taxable income

The first thing the tax system needs is a number: the trust's net income for tax purposes. Under s 95 of the ITAA 1936, the net income of the trust estate is its total assessable income minus allowable deductions, calculated as if the trustee were a resident taxpayer.

That number is often different from the income the trust can actually distribute. The two figures are worked out under different rules. Trust law and the deed determine what counts as income of the trust estate, while tax law determines the net income, and the High Court confirmed the distinction in Commissioner of Taxation v Bamford (2010) 240 CLR 481. A capital gain is a useful example: a gain on the sale of an asset is always assessable for tax, but under trust law it may sit in capital until the deed and the trustee's determination make it distributable income.

The gap between the two figures matters because of how a beneficiary's share is calculated. In Zeta Force Pty Ltd v Commissioner of Taxation [1998] FCA 728, the Federal Court confirmed the proportionate approach: a beneficiary who is presently entitled to a proportion of the distributable income is assessed on that same proportion of the net income, even where the net income is the larger figure.

Step two: decide who is presently entitled, before 30 June

With the net income known, the next question is who is entitled to it, because that decides who pays the tax. The key concept is present entitlement, and it does most of the work in the whole scheme.

Under s 95A of the ITAA 1936, a beneficiary who has a vested and indefeasible interest in income of the trust is deemed to be presently entitled to it. In practical terms, a beneficiary is presently entitled when they have an existing right to demand payment, even if the money has not actually been paid out yet.

The way present entitlement arises depends on the type of trust. In a discretionary trust, the trustee chooses: it must validly exercise the power under the deed to appoint the income to particular beneficiaries. In a unit trust, present entitlement generally follows the units, because unitholders hold a fixed interest in the income.

Timing carries most of the risk. The ATO's longstanding expectation is that a trustee of a discretionary trust makes its distribution resolution by 30 June, or by an earlier date if the deed requires it. If no beneficiary is presently entitled by the end of the year of income, there is simply no one for s 97 to assess, and the fallback rules step in. The High Court's reasoning in Bamford also points to why the deed matters so much: present entitlement and the income it attaches to are questions resolved by reference to trust law and the deed's own terms, including any deadlines and procedures the deed sets.

Where a beneficiary who is not under a legal disability is presently entitled to a share of the trust income, s 97 of the ITAA 1936 includes that share of the net income in the beneficiary's assessable income. The beneficiary then pays tax at their own rates: individuals at the graduated rates for residents, and companies at the company tax rates.

This flow-through outcome is what makes trusts attractive for splitting income across a family group. If the trust's income is appointed to several family members on lower marginal rates, the total tax can be meaningfully lower than taxing the whole amount to one person. The trade-off is that the trustee must get the paperwork right: a valid resolution, made on time, that deals with the income in the way the deed allows.

Step four: when the trustee pays the tax instead

There are three situations where the trustee is assessed rather than the beneficiaries.

Beneficiary under a legal disability: s 98 of the ITAA 1936 applies where a beneficiary is under a legal disability, which includes a minor. The trustee is assessed on that beneficiary's share at the rates that would apply to the beneficiary. This is one reason distributions to children receive so much attention from advisers.
Non-resident beneficiary: s 98(3) deals with non-resident beneficiaries. The trustee is assessed on income appointed to a non-resident beneficiary to the extent the income comes from Australian sources.
Undistributed income: s 99A is the fallback for undistributed income. Where no beneficiary is presently entitled to part or all of the net income, the trustee is assessed at the special rate Parliament has declared for that section. In practice that is the top marginal rate, currently 45% for the 2025-26 income year, plus the Medicare levy of 2%. This is the missed deadline outcome every adviser tries to prevent: income that was not validly appointed by 30 June ends up taxed at the highest individual rate, with no access to a family member's tax-free threshold or a lower corporate rate.

Section 99 plays a narrower version of the same role. For special cases such as deceased estates, where income is not otherwise taxed, the trustee is assessed at ordinary individual rates rather than the special rate.

Capital gains and franked dividends: streaming to the right beneficiary

Trusts often earn income with special tax attributes, and the law allows these streams to be directed to particular beneficiaries, but only where the deed and the resolutions support it.

Capital gains

A trust that has held an asset for at least 12 months can reduce a capital gain by the 50% CGT discount, and the ATO's guidance confirms that Australian trusts can apply the discount, while companies cannot. The discount is only useful if the gain ends up in the hands of someone who can use it. Since Bamford, a capital gain can be converted into distributable income by the trustee's determination under the deed, and Subdivision 115-C of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) then taxes the gain to the beneficiary who is presently entitled to it, so the discount is preserved in the beneficiary's hands.

Franked dividends

Where the trust receives dividends with franking credits attached, Subdivision 207-B of the ITAA 1997 governs how the credits flow through the trust. The general effect is that the credits can end up with the beneficiary who is assessed on the franked distribution, which is valuable because the credit offsets the tax on the grossed-up amount. The deed needs to allow franked distributions to be streamed, and the resolution needs to deal with them expressly, or the credits can be lost, or allocated to the wrong hands entirely.

Both features only work if the trust deed contains the necessary powers and the trustee exercises them properly. That is drafting territory where a lawyer's review usually pays for itself.

Where trust tax arrangements commonly go wrong

Most problems in trust taxation come down to a handful of recurring mistakes.

Missed resolutions: no valid resolution by 30 June, or by the earlier date the deed requires, means no beneficiary is presently entitled and s 99A applies at the top rate plus the Medicare levy. The ATO also scrutinises resolutions that are backdated after year end.
Children as beneficiaries: Division 6AA of the ITAA 1936 applies penalty rates to most unearned income distributed to children under 18, with limited exceptions such as employment income. Assuming a child is taxed at adult rates is a common and costly error.
Non-resident beneficiaries: trustee assessment and withholding issues arise under s 98, and state duty and foreign surcharges can add a layer of cost where property is involved.
Reimbursement agreements: s 100A of the ITAA 1936 can disregard a beneficiary's present entitlement where it arose under an arrangement to reimburse or benefit someone else, such as a corporate beneficiary receiving income that is then lent back to the family group. The ATO has increased its focus on s 100A, and the consequences of an application can be a trustee assessment at the top rate.
A deed that does not allow what was attempted: streaming capital gains or franked dividends, or appointing income to particular beneficiaries, requires powers in the deed. With an old or generic deed, a resolution may simply be invalid.
Poor records: the ATO expects minutes or resolutions that identify the categories of income, the beneficiaries and the amounts or proportions appointed. Without records, even a genuine decision is hard to prove.

When to bring in a lawyer or an accountant

Neither an accountant nor a lawyer can fix a missed deadline after the fact, but each has a clear role in keeping the trust compliant.

Your accountant should be involved from about May each year, working up an indicative profit, confirming which income categories exist and helping the trustee plan who should be presently entitled before 30 June. After year end the accountant prepares the trust tax return and issues distribution statements so beneficiaries can report their shares correctly.

A lawyer's role sits mainly at two points. Before 30 June, a review of the trust deed confirms whether the trustee has the power to stream capital gains and franked distributions, whether the deed imposes earlier deadlines, and whether the resolutions are properly drafted and executed. At structural moments, a lawyer advises on s 100A exposure, on changes to the beneficiary class, and on how the trust fits with the wider business and succession plan. Where a trust is being wound up, assets are being moved in specie, or a resolution has been missed, legal and accounting advice should be obtained before acting, because the options available after the event are far more limited.

The 30 June window

The whole scheme turns on one date and one document. Before 30 June each year, the trustee has to decide, validly and on time, who is presently entitled to which categories of income, and the deed has to actually permit that decision. Get those two things right and the trust works as the flow-through structure it was designed to be, with income taxed in the hands of the people who receive it. Get them wrong and the same income is taxed to the trustee at 45% plus the Medicare levy, with the integrity rules in s 100A and Division 6AA able to make the position worse. A short meeting with a tax lawyer and your accountant in May, reviewing the deed and the year's income, is inexpensive compared with the cost of a missed resolution. If your trust deed is old, your family circumstances have changed, or you are not sure your past resolutions were valid, it is worth having the structure reviewed well before the next 30 June arrives.