Many discretionary trusts are established with the intention of streaming income to beneficiaries on lower marginal tax rates. However, if the trust deed and administration are not aligned with Australian taxation law, the intended tax outcomes may not be achieved.
Understanding Trust Income Streaming
Income streaming allows a trustee to distribute specific classes of income, such as capital gains or franked dividends, to particular beneficiaries. To be effective, the trust deed must expressly permit streaming and clearly define trust income. Without this, all income may be treated as proportionately distributable, limiting tax planning flexibility.
Trustee Resolutions and Timing
Trustee distribution resolutions must be made by 30 June each year. These resolutions should:
- Clearly identify beneficiaries
- Specify income types or amounts
- Be consistent with the trust deed
Late or invalid resolutions can result in the trustee being taxed at 45% plus Medicare levy.
Beneficiaries and Tax Implications
Distributions to adult beneficiaries are generally taxed at their marginal tax rates. However:
- Minors may be taxed at penalty rates
- Corporate beneficiaries (“bucket companies”) may trigger additional considerations, including Division 7A
- Improper arrangements may attract scrutiny under anti-avoidance provisions such as reimbursement agreement rules
Administrative and Compliance Risks
Even with a compliant deed, poor record-keeping and inconsistent accounting can undermine income streaming. Trust income for tax purposes does not always match accounting profit, making professional oversight essential.
Getting It Right
Trust structures can be powerful when correctly established and managed, but small errors can be costly. Engaging an experienced accountant helps ensure distributions are valid, compliant, and tax‑effective, giving you confidence that your trust is working as intended under Australian taxation law.
Speak with our team today to stay compliant and protect your growing business.