Family trusts are a powerful tool for asset protection, tax planning, and wealth management in Australia. But while they offer many benefits, they can also come with complexities —particularly around distributions. Mismanaging these can result in serious tax consequences and even legal disputes. Having a competent business accountant Melbourne by your side, like Nobel Thomas, can help ensure the trust is used effectively with minimum fuss. Here’s why you may need to tread carefully.
What Is a Family Trust Distribution?
A distribution refers to the income or capital a family trust allocates to its beneficiaries each financial year. Your tax accountant Melbourne will generally help you prepare the trust distributions each financial year – typically with a view to helping you save tax. If you prefer not to use an accountant then the trustees, on their own, typically decide how to distribute the trust’s income to minimise tax and manage family wealth. Though it is highly recommended to use a tax accountant Melbourne to help you determine the most effective distributions.
Risks of Mishandling Trust Distributions
- Tax Penalties Under Section 100A
One of the biggest current risks comes from the ATO’s focus on Section 100A of the Income Tax Assessment Act 1936. This provision allows the ATO to disregard trust distributions if they believe there’s a reimbursement agreement—where the beneficiary doesn’t actually benefit from the income. For example, suppose a mum and dad distributes $30,000 to their 22 year old child but with no intention of their child ever being entitled to the $30,000. If the $30,000 is instead given back to the parents, then this would not be allowed by the ATO.
- Distributions to Minors or Ineligible Beneficiaries
Distributions to children under 18 are heavily taxed—up to 66%. Also, if distributions are made to someone not listed as a beneficiary in the trust deed, this can be invalid and trigger tax and legal issues. Again, best to use a business accountant Melbourne to help you determine end of financial year distributions.
- Failing to Document Resolutions Properly
Trustees must make distribution decisions and document them before 30 June each year. Failing to do so can result in the trustee being taxed at the highest marginal rate, close to 50% tax! This is a very important reason why using a competent tax accountant Melbourne can help prevent undocumented trust distributions being made.
- Unpaid Present Entitlements (UPEs)
If a distribution is declared but not paid, it becomes a UPE. The ATO treats some UPEs as loans, and these may trigger Division 7A rules—especially if the trust is linked to a private company. There have been legal challenges to this position so best to contact your business accountant Melbourne, like Nobel Thomas, for advice in this area.
Best Practices for Trust Distributions
- Review your trust deed annually: Make sure it allows the intended distributions and that all beneficiaries are valid. Again, your tax accountant Melbourne can check for you if you are not sure.
- Engage a tax adviser: Especially important with the ATO’s scrutiny of Section 100A.
- Prepare distribution resolutions before 30 June: And keep them well-documented.
- Avoid “round-robin” arrangements: Where income is distributed to a beneficiary who then sends it back to another party.
- Understand the tax implications: Including Medicare levies, Division 7A risks, and marginal tax rates.
Final Thoughts
Family trusts are not “set and forget” structures. Trustees have legal obligations, and with the ATO paying closer attention to trust arrangements, particularly under Section 100A, getting distributions wrong can be costly. However, using a competent business accountant Melbourne will ensure you stay compliant and will help you with careful planning, timely advice, and meticulous documentation.
Need help reviewing your trust structure or preparing your distribution resolutions? Speak to a trusted accountant, like Nobel Thomas,who specialises in family trusts.
