How are family trust distributions taxed in Australia?

A family trust (or discretionary trust) is a common structure used by Australian families and business owners to manage and distribute income. The trust itself generally does not pay tax — instead, income is distributed to beneficiaries who pay tax at their own marginal rates.

How distributions are taxed: Each financial year, the trustee decides how to distribute the trust's net income among the eligible beneficiaries. Each beneficiary is assessed on their share at their personal marginal tax rate. If income is distributed to a beneficiary in a lower tax bracket (e.g. a spouse on a lower income, or adult children), the overall family tax burden can be reduced — this is called income splitting.

Trust Tax Rate (undistributed income): If the trustee does not distribute all income, the undistributed amount is taxed in the trust at the highest marginal rate of 47% (including Medicare levy). Trustees almost always distribute all income to avoid this.

Section 100A: The ATO has significantly tightened enforcement of Section 100A, an anti-avoidance provision that applies when a beneficiary has a trust entitlement but does not actually benefit from the funds (i.e. the money goes to someone else). Post-2022 ATO guidance and court decisions have narrowed what constitutes acceptable trust arrangements, particularly within family groups. The ATO has indicated it will apply Section 100A to distributions to adult children where they do not actually receive the cash benefit.

Trust tax returns: The trust itself lodges an annual trust tax return and each beneficiary receives a tax statement showing their share of net income and any franking credits or foreign income to include on their own return.