Quick answer: A family trust usually pays no tax itself. Each year the trustee decides which beneficiaries get the income, and each beneficiary pays tax at their own rate — which is how a $100,000 trust profit can cost $22,520 in one person’s hands but only $13,040 split between two. Miss the 30 June distribution resolution and the trustee is taxed at 47%. Kids under 18 cop penalty rates above $416. And a proposed 30% minimum trust tax from 1 July 2028 — draft legislation, not yet law — would end most of the income-splitting benefit.
How a family trust is actually taxed
A discretionary family trust is a flow-through vehicle. The trust earns income — business profit, rent, dividends, interest, capital gains — and before midnight on 30 June the trustee makes a distribution resolution: who gets what. Whoever is “presently entitled” to a share of the trust’s net income includes that share in their own tax return and pays tax at their own rate.
The trust itself pays tax in only three situations:
- Undistributed income — anything no beneficiary is presently entitled to is assessed to the trustee under section 99A at the top marginal rate plus Medicare: 47% in 2026-27.
- Beneficiaries under a legal disability or non-residents — the trustee pays on their behalf at their applicable rates.
- Family trust distribution tax (FTDT) — if the trust has made a family trust election and distributes outside the defined family group, the trustee pays 47% on that distribution.
So the much-repeated line “trusts don’t pay tax” is true only when the trustee does the paperwork properly. Get it wrong — or do nothing — and 47% is the price.
Tax rates on trust distributions in 2026-27
Where the income lands decides the rate. The 2026-27 resident individual brackets are 0% to $18,200, 15% from $18,201 to $45,000, 30% to $135,000, 37% to $190,000 and 45% above, plus the 2% Medicare levy.
| Who receives the distribution | How it’s taxed | 2026-27 rate |
|---|---|---|
| Adult resident beneficiary | Their own marginal rates on the distribution | 15%–47% incl. Medicare |
| Corporate beneficiary (“bucket company”) | Company tax rate; franking credits may attach | 25% or 30% |
| Minor under 18 (unearned income) | Penalty rates — designed to kill income splitting to kids | $416 tax-free, then 66% to $1,307, then 47% |
| Non-resident beneficiary | Trustee assessed on their behalf; no tax-free threshold | 30%–47% |
| Nobody (no valid resolution) | Trustee assessed under s99A | 47% |
Two things people miss in that table. First, the distribution forms part of the beneficiary’s assessable income, so it stacks on top of their salary — a $40,000 distribution to someone already earning $100,000 is taxed at their 30%-plus bracket, not from dollar one. Second, the 2% Medicare levy applies on top, and the extra income can push a beneficiary over thresholds like the Medicare levy surcharge or the private health insurance rebate tiers.
Worked example 1: $100,000 split two ways vs one
The Patel family trust earns $100,000 net income in 2026-27. Neither spouse has other income.
Option A — all $100,000 to one spouse. Tax at 2026-27 rates: 15% on the $26,800 between $18,200 and $45,000 ($4,020), plus 30% on the $55,000 above $45,000 ($16,500). That’s $20,520, plus $2,000 Medicare levy: $22,520 total.
Option B — $50,000 to each spouse. Each pays 15% on $26,800 ($4,020) plus 30% on $5,000 ($1,500), = $5,520, plus $1,000 Medicare: $6,520 each. $13,040 total.
The split saves $9,480 — same income, same family, different paperwork. This is the entire economic logic of the discretionary trust: the trustee re-allocates the family’s taxable income every year to whoever can bear it cheapest. (Independent modelling cited in the trust-tax debate puts the same $100,000 at roughly $22,788 earned as salary versus about $13,576 split through a trust — the same ballpark as the arithmetic above.)
Worked example 2: $2,000 distributed to a 15-year-old
Distributing to young children is the classic “too clever” move, and the penalty rates exist precisely to punish it. Unearned income of a minor — which includes ordinary family trust distributions — is taxed at:
- $0–$416 at normal adult rates (usually $0 if the child has no other income),
- $417–$1,307 at a flat 66%,
- above $1,307 at the top rate: 47% including Medicare.
On a $2,000 distribution: $416 tax-free, $890 at 66% ($587.40), and $694 at 47% ($326.18). Total tax: about $914 on $2,000 — an effective rate near 46%. The one big exception is a testamentary trust (set up under a will), where minors are taxed at normal adult rates on the inherited assets’ income — though since 1 July 2019 that concession is limited to income from assets actually transferred from the deceased estate.
How distributions work in practice (the part people botch)
The tax outcome lives or dies on documentation. A valid distribution needs:
- A trust deed that allows it. Only people named as beneficiaries in the deed can receive distributions, and the deed must permit streaming if you want to stream (some older deeds don’t).
- A resolution before 30 June. The trustee must resolve — in writing, minuted — who gets what share of the year’s income before the year ends. A resolution dated 1 July is worthless for the year just ended.
- A statement of distribution with the trust tax return, showing each beneficiary’s share of each income type.
- The trust tax return itself (the trust needs its own TFN; an ABN too if it carries on enterprise). Beneficiaries report their share in their own returns.
Crucially, “distributed” doesn’t mean “paid in cash”. A beneficiary can be made presently entitled on paper while the cash stays in the trust — an unpaid present entitlement (UPE), effectively a loan from the beneficiary back to the trust. That flexibility is useful, but it’s also where section 100A lives (see below), and for corporate beneficiaries an unpaid entitlement can trigger Division 7A deemed-dividend problems if it isn’t put on complying loan terms.
The 30 June trap: $47,000 for doing nothing
Take the Patel example again. If the trustee forgets the resolution — or makes one the deed doesn’t allow, or distributes to someone who isn’t a beneficiary — the $100,000 has no one presently entitled to it. The trustee is assessed under s99A at 47%: $47,000, versus $13,040 with a proper split. That’s a $33,960 penalty for an unsigned minute.
This is also why “the trust will just keep the profits for next year” doesn’t work. A trust cannot retain income and be taxed later at a lower rate — retained income is undistributed income, taxed at 47% now. If you want profits taxed at a flat rate and retained, that’s what a company is for.
Streaming: giving different income to different people
“Streaming” means directing specific types of income to specific beneficiaries — for example, sending the year’s capital gains to the low-income spouse while the rental income goes to someone else. Two hard rules:
- Only capital gains and franked distributions can be streamed under the law (the 2011 streaming amendments). Everything else is shared out proportionately.
- The trust deed must allow it. If the deed is silent or forbids streaming, a streamed resolution may be invalid — and an invalid resolution means s99A at 47%.
Worked example 3: The trust sells shares held 14 months for a $40,000 capital gain. Under 2026-27 rules the gain accrued before 1 July 2027 still qualifies for the 50% CGT discount, so the net gain is $20,000. The trustee streams that $20,000 to the non-working spouse (tax: $4,020 income tax + $400 Medicare = $4,420 at 2026-27 rates) instead of it landing with the $180,000-a-year spouse (who’d pay roughly $9,400 on it). The remaining ordinary income must still be fully distributed to someone — stream the gain but forget the residue, and the trustee pays 47% on what’s left.
From 1 July 2027 the CGT landscape changes: the 50% discount is replaced by CPI cost-base indexation plus a 30% minimum tax on real gains (gains accrued before that date keep the discount; investors in new residential builds can choose either). Trusts holding growth assets need planned sales modelled under both regimes — see our CGT reform 1 July 2027 guide.
Section 100A: the reimbursement agreement trap
The ATO’s biggest current focus in trust land is section 100A — “reimbursement agreements”. In plain English: a distribution is a sham if the beneficiary is entitled on paper but the economic benefit flows to someone else, and the dominant purpose was paying less tax.
The textbook case: the trust “distributes” $40,000 to an adult child at university because the child has a low tax rate. The money is never paid to the child. Instead it pays the parents’ mortgage, household bills or business debts. There is no genuine family or commercial reason for the arrangement — the purpose was the tax saving. The ATO cancels the benefit and the trustee is assessed at the top rate.
That doesn’t make all family distributions wrong. Genuinely paying money to adult children — university fees paid to them, money actually in their account — is a different story. The rule of thumb: distributions need to be real, documented and explainable. If the beneficiary couldn’t point to what they received, 100A is in play.
Trust losses: the one-way street
A trust cannot distribute a tax loss to beneficiaries. If the trust makes a $25,000 loss (say, a negatively geared property held in the trust), that loss is trapped inside the trust and carried forward to offset future trust income — subject to the trust loss rules. It cannot reduce your salary on your personal return.
This is the asymmetry most guides gloss over: profits flow out to whoever pays least tax, but losses stay locked in. A negatively geared property in a family trust therefore loses one of negative gearing’s main attractions (offsetting the loss against your wages). Model this before you buy — our negative gearing guide and capital loss carry-forward guide cover the mechanics.
Bucket companies: still useful, but the ground is shifting
A “bucket company” is a private company named as a trust beneficiary. Distribute $100,000 to it and the tax is capped at the company rate — 25% for a base rate entity, i.e. $25,000 instead of up to $47,000 in individual hands. The catch: the money is now stuck in the company. Getting it out later means franked dividends to shareholders (with franking credits attached), and unpaid entitlements sitting in the company can attract Division 7A if not handled on complying terms.
The bigger warning is the proposed 30% minimum trust tax from 1 July 2028. Treasury released draft legislation on 3 September 2026 — it is not yet law and may change. As drafted:
- The trustee would pay at least 30% on the trust’s income before distributions.
- Individual beneficiaries would get a credit for that tax, but it would be non-refundable — it can reduce their tax to nil but never comes back as cash. Distributing to a low-rate spouse stops saving tax.
- Corporate beneficiaries would get no credit at all — the bucket company strategy faces tax at the trustee level and again when the company pays out, pushing effective rates toward 60% or more.
- A trust could opt out by electing fixed entitlements for nominated beneficiaries — giving up the yearly flexibility that made the discretionary trust attractive in the first place.
- Rollover relief is proposed from 1 July 2027 to 1 July 2030 to restructure out of a discretionary trust into a company or fixed trust without CGT consequences.
Worked example 4 — the proposal in dollars: $60,000 distributed to a non-working spouse today costs $8,520 income tax + $1,200 Medicare = $9,720. Under the proposed minimum tax, the trustee pays 30% ($18,000), non-refundable — the family pays $18,000, an extra $8,280 for the same distribution. Structures where beneficiaries already pay 30% or more are largely unaffected, which is why roughly half of discretionary trusts are expected to face no extra tax. Don’t restructure in a panic over a proposal — review, model, and decide with your adviser.
Family trust elections: the 47% tripwire
Some trusts make a family trust election (FTE) to access concessions — notably, it helps non-fixed trusts satisfy the trust loss rules so carried-forward losses survive. The price is a boundary: distribute income or capital to anyone outside the “family group” defined in the election, and family trust distribution tax of 47% applies to that distribution. Before making an FTE, check every potential beneficiary against the family group — one distribution to an in-law or family friend outside the group triggers the punitive rate. See our company tax rates guide for how the 25%/30% company rates interact with trust structures.
Property in a trust: the main residence trap
One of the most expensive misunderstandings in trust land: the main residence CGT exemption generally requires the ownership interest to be held by an individual. Simply living in a house owned by your discretionary family trust does not give the trust the same exemption an individual owner gets. There are narrow exceptions (some deceased estates, special disability trusts), but as a planning rule, a trust-owned property you live in is fully exposed to CGT on sale. This alone decides the “own name vs trust” question for many families — get advice before the contract is signed, because transferring a property you already own into a trust can itself trigger CGT and stamp duty at market value.
Centrelink counts the trust against you
Non-tax but financially material: if you (or a close family member) are the trustee, appointer or otherwise the “controller” of a family trust, Centrelink and DVA can attribute the trust’s assets and income to you for the assets and income tests. Trust distributions won’t quietly fund an age pension application. Factor this in before using a trust near retirement.
When a family trust is NOT worth it
Honest arithmetic most promoters skip. Setting up a discretionary trust typically costs $2,000–$3,500, and annual administration — accounting, resolutions, the trust tax return — runs $1,500 or more every year. If the trust earns $20,000 and clever distribution saves you $3,000 of tax, you’ve roughly broken even after admin. The trust earns its keep when there’s meaningful income to split ($50,000+ a year is a common rule of thumb), when asset protection matters (a business exposed to creditors), or for succession planning. For a PAYG employee with $15,000 of ETF distributions and no business risk, the compliance cost usually eats the benefit.
Common mistakes
- No written resolution by 30 June — a verbal “we’ll split it” is not a resolution. $47,000 on $100,000.
- Distributing to non-beneficiaries — check the deed’s beneficiary class before naming anyone.
- Streaming without deed authority — capital gains and franked distributions can only be streamed if the deed permits it.
- Distributing big amounts to young kids — the 66%/47% minor rates turn a “saving” into a surcharge.
- Paper distributions with no economic reality — section 100A territory; the benefit must actually reach the beneficiary.
- Forgetting the Medicare levy — distributions add 2% and can tip beneficiaries over surcharge and rebate thresholds.
- Assuming the proposal is law — the 30% minimum trust tax is draft legislation for 2028, not current law. Restructuring now on a maybe is expensive.
Tips to get it right
- Estimate the trust’s taxable income before 30 June — you can’t optimise what you haven’t measured. Interim accounts in May/June pay for themselves.
- Match distributions to beneficiaries’ total taxable income, not just the trust amount — a distribution stacked on a high salary wastes the low brackets.
- Keep a yearly distribution file: deed extract, signed resolution, minutes, statements of distribution. If the ATO asks about 100A in three years, this file is your defence.
- Review the deed every few years — marriages, divorces, births and deaths change who should (and legally can) receive income.
- If a bucket company is involved, put unpaid entitlements on complying Division 7A loan terms and diary the minimum yearly repayments.
- Model any planned asset sales against the 1 July 2027 CGT changes and the proposed 2028 trust minimum tax before crystallising gains — our CGT calculator and income tax calculator give you the raw numbers to model with.
FAQ
Does a family trust pay tax?
Usually no — income flows through to beneficiaries, who pay at their own rates. The exceptions are undistributed income (trustee pays 47%), distributions outside the family group after a family trust election (47% FTDT), and amounts assessed to the trustee for non-resident or under-disability beneficiaries.
Can I distribute trust income to my children to save tax?
Only up to $416 a year at normal rates for under-18s. Above that, penalty rates of 66% to $1,307 and 47% beyond apply to unearned income. Adult children (18+) at university with little income are the classic legitimate low-rate beneficiaries — while current rules apply.
What happens if I miss the 30 June distribution deadline?
The income has no beneficiary presently entitled to it, so the trustee is assessed under s99A at 47%. Backdating a resolution doesn’t fix it.
Can the trust keep profits and pay tax later?
No. Retained income is undistributed income, taxed at 47% now. Trusts are flow-through by design; retention at a flat rate is a company’s job.
Is the 30% minimum trust tax law yet?
No. It was announced in the May 2026 Federal Budget, Treasury released draft legislation on 3 September 2026, and it is proposed to start 1 July 2028. Drafts can change — treat it as very likely in close to this form, not locked in.
Family trust vs company — which is better now?
A company taxes retained profits at a flat 25% (base rate entities) with no yearly distribution gymnastics, but offers no income splitting. A trust offers flexible splitting and asset protection but costs more to run and faces the proposed 2028 minimum tax. For new trading businesses, a company is increasingly the simpler default; trusts still win where asset protection or succession planning is the priority. Our CGT vs income tax guide explains how the two tax systems interact.
The bottom line
A family trust is a distribution machine: put income in, and each 30 June the trustee decides whose tax rates apply to it. Used properly in 2026-27, splitting $100,000 between two adults saves nearly $9,500 versus one person wearing it all. Used sloppily — no resolution, kids’ penalty rates, sham paper distributions — the same trust hands the ATO 47%. And with a 30% minimum trust tax proposed from 2028 and the CGT discount ending in 2027, every existing trust deserves a review this financial year, not next. The structure still works; the autopilot version of it doesn’t.
General information only, not personal tax advice. Trust deeds and family circumstances vary — confirm the strategy with your accountant before 30 June.
