Understanding the Tax Treatment of Trusts in Australia for 2026

For many Australian families and business owners, trusts form a cornerstone of sound financial strategy. While they offer significant benefits in protecting assets and managing wealth, understanding the tax treatment of trusts can feel complex. The good news is that the core principles, when approached with care, are surprisingly straightforward.

Written by Panbo Ye, CFP® | FCPA | SSA | Founder, Everglow

As a financial adviser, I have guided many clients through the nuances of trust structures. My work as the founder of Everglow, a Sydney-based accounting, wealth, and capital advisory firm, is built on helping people make clear and confident financial decisions. This guide aims to demystify the tax treatment of trusts in Australia, providing practical insights grounded in real-world scenarios. We will explore how income flows through a trust, who is responsible for the tax, and how thoughtful stewardship can help you meet your long-term financial goals.

Before we dive into the specific tax rules, it’s helpful to have a solid grasp of what a trust is. Our guide on how trusts work in an Australian context lays the groundwork, explaining the key roles of a settlor, trustee, and beneficiary. From there, we will build on those concepts to explore:

• The 'conduit principle' and why it's so central to trust taxation.
• How different trust structures (like discretionary vs. unit trusts) can lead to different tax outcomes.
• The specific tax responsibilities of both trustees and beneficiaries—and when each one pays.

How Trust Taxation Works: The Conduit Principle

To understand how trusts are taxed in Australia, one must first grasp the ‘conduit principle’. The easiest way to think of a trust is as a pipeline. Its job is to channel income from business activities or investments through to the people intended to receive it—the beneficiaries.

When the trust passes this income along, the trust itself generally does not pay tax on that amount. Instead, the tax liability flows through the pipeline with the income. The beneficiary receives their share of the income, declares it on their own tax return, and pays tax at their personal marginal rate. This pass-through mechanism is what provides such valuable flexibility.

This diagram shows the three key players and how they interact.

As you can see, the Settlor establishes the trust, the Trustee manages it, and the Beneficiary is the one who ultimately receives the benefits. Understanding this flow is central to determining who pays the tax.

Present Entitlement: The Key Concept

For the conduit principle to work, a beneficiary must be ‘presently entitled’ to their share of the trust's income. This is a critical legal term that triggers the entire system. It means the beneficiary has a fixed and immediate right to demand payment from the trustee, even if the cash has not yet been physically transferred.

This entitlement is created by a trustee resolution—a formal decision that must be made and documented before the financial year ends on 30 June. If this deadline is missed, any undistributed income may be trapped in the trust, where it is typically taxed at the highest marginal rate. Depending on your circumstances, different rules may apply, such as those for a bare trust.

A trustee’s decision to make a beneficiary ‘presently entitled’ is the action that passes the tax liability from the trust to that beneficiary. For most discretionary trusts, it is the most important annual decision they make.

Defining the 'Income of the Trust'

Another layer of complexity is knowing what 'income' we are referring to. The tax law, specifically Division 6 of the Income Tax Assessment Act 1936{target="_blank" rel="noopener noreferrer"}, refers to the ‘net income of the trust’. You can think of this as the trust's taxable income—its total assessable income minus allowable deductions, calculated as if the trust were a resident taxpayer.

A potential challenge arises when this ‘net income’ for tax purposes differs from the ‘accounting income’ calculated under the rules of the trust deed. When these two figures do not align, it can create difficulties in ensuring distributions are effective and tax liabilities land as intended. Navigating these potential mismatches often calls for careful management and professional advice.

Comparing Common Trust Structures and Tax Outcomes

Choosing a trust structure is a foundational decision that will shape how assets are protected, how tax is managed, and who ultimately benefits from your efforts. The tax treatment of trusts often depends on whether beneficiaries' entitlements are fixed or if the trustee can decide who gets what each year. This distinction is the bedrock of the most common trust structures in Australia.

Discretionary or Family Trusts

For Australian families, the discretionary trust is a common and versatile option. It gives the trustee the power—or discretion—to decide which beneficiaries receive income or capital each year, and in what amounts.

This flexibility is its defining feature, especially for tax planning. A trustee can strategically stream income to family members on lower marginal tax rates, such as a spouse with a lower income or an adult child at university, to minimise the family’s overall tax burden. This is why they are often called "family trusts." You can learn more in our guide to discretionary trusts.

This flexibility, however, must be exercised with care. The Australian Taxation Office (ATO) has detailed rules governing distributions and pays close attention to arrangements that may appear to exist solely for tax avoidance.

Unit Trusts

Where a discretionary trust offers flexibility, a unit trust provides certainty. It operates with fixed interests. Beneficiaries, known as "unitholders," hold a specific number of units, much like shareholders in a company.

Their entitlement to the trust’s income and capital is directly proportional to the number of units they own. There is no discretion involved in the distributions.

This predictable structure makes unit trusts a suitable vehicle for unrelated parties entering a business or investment venture together, such as a property syndicate. For example, if four investors contribute equally to buy a commercial building, they might each hold 25% of the units, guaranteeing them each 25% of the net rental income.

Testamentary Trusts

A testamentary trust is unique as it is not created during your lifetime. Instead, it is established through your Will and comes into effect after you pass away. Its purpose is to manage and protect the assets you leave for your beneficiaries as part of a considered estate plan.

These trusts can be discretionary or fixed, but they share a powerful tax advantage.

A key tax benefit of a testamentary trust is how income distributed to minor beneficiaries (children under 18) is treated. Unlike income from a standard family trust, this income is taxed at normal adult marginal rates, not the penalty rates that usually apply to minors' unearned income.

This specific rule, detailed in the ATO’s guidance on excepted trust income{target="_blank" rel="noopener noreferrer"}, can result in significant tax savings for a family managing an inheritance for young children.

Comparison of Common Australian Trust Types

The right structure depends entirely on your objectives—whether you need the flexibility of a discretionary trust for family tax planning, the certainty of a unit trust for a business venture, or the protective benefits of a testamentary trust for your estate.

Who Is Responsible for Paying Tax on Trust Income?

So, who actually pays the tax on trust income? It’s a common question, and the answer is that the liability can fall on either the beneficiaries or the trustee. The deciding factor is the trustee's annual resolution on how to distribute the trust's income. This single step determines where the tax obligation rests.

The fundamental rule is this: when a beneficiary is made presently entitled to a share of the trust’s income, the responsibility for paying tax on that income flows through to them. They must declare it in their personal tax return and pay tax at their own marginal rate.

When Beneficiaries Pay the Tax

A beneficiary becomes liable for tax the moment a trustee formally resolves to distribute a share of the trust’s income to them. This is where the concept of present entitlement is so important. The tax liability is triggered by the entitlement to the income, not the physical receipt of the cash.

For example, a trustee might sign a resolution on 25 June to distribute $20,000 of trust income to an adult beneficiary. That individual is now responsible for the tax on that $20,000 for that financial year, even if the money doesn't arrive in their bank account until September.

When the Trustee Pays the Tax

What happens if income is not effectively distributed to a beneficiary? In that case, the tax liability remains with the trustee, and the tax is paid by the trust—often at less favourable rates.

Here are the key scenarios where the trustee pays the tax:

• Undistributed Income: If any income is left in the trust after the 30 June deadline, the trustee is assessed on it. This undistributed income is taxed at the highest individual marginal rate (currently 45% plus the Medicare levy).
• Distributions to Minors: Income distributed to a beneficiary under 18 is a special case. To discourage income splitting with children, this income is generally taxed at penalty rates, and the trustee is assessed on it.
• Non-Resident Beneficiaries: When income is allocated to a beneficiary who is not an Australian resident for tax purposes, the trustee is usually required to pay the tax on their behalf.
• Beneficiary Under a Legal Disability: If a beneficiary is legally unable to manage their own affairs (for reasons other than being a minor), the trustee is assessed on that income, though typically at what would have been the beneficiary's marginal rates.

This is why the role of the trustee is so pivotal in steering the trust's tax outcomes. You can learn more about the duties involved in our guide on what a corporate trustee is.

The trustee's annual resolution is not just an administrative task; it is the definitive action that directs the flow of tax liability. A failure to act, or acting incorrectly, can result in significant and often unnecessary tax costs.

Key Risks and Responsibilities for Trustees

Taking on the role of a trustee is a serious commitment. It is more than a title; it is a fiduciary duty to act in the best interests of every beneficiary. Disciplined management and accurate records are not just good habits—they are your fundamental obligation.

The most costly mistakes we see often stem from simple administrative oversights, not complex tax schemes. Understanding these common pitfalls is the first step to ensuring your trust runs smoothly and compliantly.

Critical Trustee Errors to Avoid

One of the most frequent and expensive errors is failing to make and correctly document trustee resolutions by the 30 June deadline. This is the legal action that dictates who is taxed on the trust's income. A late, missing, or invalid resolution can trap income in the trust, leaving the trustee to be taxed at the highest marginal rate.

Another common mistake is making distributions to people who are not eligible beneficiaries under the trust deed. Your trust deed is a binding legal rulebook. If you distribute to someone outside the defined "class of beneficiaries," the distribution can be declared void, again trapping that income in the trust at penalty rates.

As a trustee, your responsibility is to manage the trust's affairs with the same care you would apply to your own, guided strictly by the trust deed and prevailing laws. Complacency can be an expensive mistake.

Navigating ATO Integrity Rules

With great flexibility comes great scrutiny. The ATO has powerful tools to ensure trusts are not used simply to avoid tax. One of the sharpest of these is Section 100A of the Income Tax Assessment Act 1936.

Section 100A targets "reimbursement agreements." This is where a beneficiary is made entitled to trust income (and pays tax on it), but in reality, someone else enjoys the economic benefit. If the ATO finds an arrangement contravenes Section 100A, the trustee can be assessed on that income at the highest marginal tax rate. The ATO's focus on these arrangements, detailed in publications like Taxpayer Alert TA 2022/1, signals how important it is for all distributions to be genuine. This is especially relevant in structures involving corporate beneficiaries, which you can learn about in our guide on what a bucket company is and how it works with a trust.

For trusts linked to a business, Division 7A is another major risk area. These rules are designed to stop profits from being taken from a private company tax-free as loans. If your trust makes a loan to a beneficiary using funds from a private company beneficiary, that loan may be treated as a taxable dividend unless it is placed under a compliant loan agreement, as outlined in the ATO's Division 7A fact sheets.

Practical Next Steps for Trust Management

Managing a trust requires disciplined action and thoughtful planning over time. Here are a few practical steps to consider:

1. Review Your Trust Deed: Your trust deed is the ultimate rulebook. Read it carefully to understand who the beneficiaries are, what types of income can be distributed, and what powers the trustee has.
2. Document Everything: Keep meticulous records of all decisions, especially the annual trustee resolutions to distribute income. These documents are your primary evidence of compliance.
3. Meet Key Deadlines: Diarise the 30 June deadline for making and documenting trustee resolutions. Missing this date can have significant tax consequences.
4. Seek Professional Guidance: The tax treatment of trusts is a specialised area. Working with qualified professionals can provide clarity and help you navigate your obligations. Our team provides dedicated tax planning and advisory services to help clients manage these responsibilities with confidence.

The key to sound trust management is understanding that the trustee's duties are as important as the structure's benefits.

If you would like clarity on how these principles may apply to your own circumstances, you may wish to speak with a qualified adviser. You can contact Everglow on 1300 913 929 or email contact@everglow.au to arrange a discussion.

General Advice Warning: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation, or needs. Before acting on any information, you should consider whether it is appropriate for your circumstances and seek personal financial, tax, or legal advice from a qualified professional.