Trust Distributions and Tax: What Every Australian Trustee Must Do Before 30 June 2026

Introduction

The end of the financial year is always a critical time for Australian trustees — but in 2026, the stakes are higher than ever. With the ATO intensifying its scrutiny of trust arrangements and significant legal uncertainty surrounding unpaid present entitlements (UPEs), getting your trust distributions right before 30 June is not just good practice — it’s essential.

Whether you manage a family discretionary trust, a unit trust, or a hybrid structure, missing the deadline or making an invalid resolution can result in the trustee being taxed at the top marginal rate of 47% on undistributed income. That’s a costly mistake that’s entirely avoidable with the right preparation.

Here’s everything you need to know — and do — before 30 June 2026.

How Trust Distributions Work in Australia

A discretionary (family) trust allows the trustee to decide which beneficiaries receive income each year, and in what proportions. For tax purposes, the goal is to create a “present entitlement” — a vested, indefeasible right for a beneficiary to demand payment from the trust.

This entitlement must be established by 30 June for the beneficiary (rather than the trustee) to be assessed on that share of the trust’s net income. If no valid resolution is made and there’s no default clause in the trust deed, the trustee faces assessment under Section 99A of the Income Tax Assessment Act 1936 — at the top marginal tax rate.

The 30 June Deadline: What Trustees Must Do

Make a Valid Trustee Resolution

The trustee must pass a clear, unambiguous resolution to distribute the trust’s income by midnight on 30 June 2026. If your trust deed specifies an earlier deadline, that date takes precedence.

A valid resolution must:

• Comply with the trust deed — only eligible beneficiaries can receive distributions
• Be clear and certain — specify each beneficiary’s entitlement as a fixed dollar amount or percentage
• Be documented in writing — especially if you’re streaming capital gains or franked dividends

Vague or contingent resolutions (such as those dependent on a post-year-end income calculation) may be deemed ineffective by the ATO, leaving the trustee exposed.

What Happens If You Miss the Deadline?

If no valid resolution is made by 30 June:

1. Default beneficiaries named in the trust deed may automatically receive the income — which may not be tax-effective
2. The trustee is assessed on undistributed income at 47% (including Medicare levy) under Section 99A

Neither outcome is desirable. Acting early gives you control over the tax outcome.

Section 100A: The ATO’s Anti-Avoidance Focus

One of the ATO’s biggest compliance priorities in 2025–26 is Section 100A — an anti-avoidance provision that can disregard a beneficiary’s present entitlement and tax the trustee at the top rate instead.

Section 100A applies where there is a “reimbursement agreement”: a beneficiary is made entitled to income, but the economic benefit flows to someone else, with a purpose of reducing tax. For example, distributing income to an adult child who then hands the money back to the parents could trigger Section 100A.

The key exception is “ordinary family or commercial dealing” — arrangements that can be explained by genuine family or commercial objectives, not just tax minimisation.

The ATO’s Traffic Light System (PCG 2022/2)

The ATO’s Practical Compliance Guideline PCG 2022/2 categorises trust arrangements into risk zones:

Risk Zone	Description
Green (Low Risk)	Funds paid to the beneficiary for their own use; UPEs placed on compliant Division 7A loan terms
Red (High Risk)	Funds gifted back to the trust; circular flows; distributions to entities with losses; adult children entitled but parents use the funds

If your arrangement falls in the red zone, expect ATO scrutiny. Review your distribution strategy with a tax adviser before 30 June.

Unpaid Present Entitlements (UPEs) and Division 7A

When a trust distributes income to a private company beneficiary but doesn’t physically pay the cash, an Unpaid Present Entitlement (UPE) arises. The ATO’s longstanding position is that this UPE constitutes financial accommodation — effectively a loan from the company to the trust — which can trigger Division 7A if not managed correctly.

If treated as a Division 7A loan, the amount becomes a deemed unfranked dividend, taxable to the trust at full rates.

To avoid this, the UPE must either be:

• Paid out to the corporate beneficiary before its tax return lodgment date, or
• Placed on a Division 7A compliant loan agreement (minimum interest rate, repayments over 7 years)

The Bendel Case: Important 2026 Update

In a significant development, the Full Federal Court ruled in Commissioner of Taxation v Bendel that a UPE owed to a corporate beneficiary is not a loan for Division 7A purposes. However, the ATO has been granted special leave to appeal to the High Court — and until that decision is handed down, the ATO will continue to administer the law according to its existing view.

Our advice: Continue managing UPEs to corporate beneficiaries as if Division 7A applies. Don’t wait for the High Court ruling before acting.

Streaming Capital Gains and Franked Dividends

Streaming allows trustees to direct specific types of income to beneficiaries who can best use their tax attributes — for example, directing a capital gain to a beneficiary with capital losses, or a franked dividend to a beneficiary who can fully utilise the franking credits.

To validly stream income, you need:

1. Power in the trust deed to stream different classes of income
2. A specific entitlement — the beneficiary’s share must be directly referable to the capital gain or franked dividend
3. Written documentation by the relevant deadline

Key deadlines for streaming:

• Franked distributions: Written record required by 30 June
• Capital gains: Written record required by 31 August (though the general income resolution should still be made by 30 June)

Tax Rates by Beneficiary Type

The tax outcome of a trust distribution depends on who receives it:

Beneficiary Type	Tax Treatment
Individual	Taxed at their marginal rate — ideal for income splitting
Private company	Taxed at 25% (base rate entity) or 30% — but UPE risks apply
Another trust	Must be distributed to an ultimate beneficiary to be taxed
Outside family group (FTE trusts)	Family Trust Distribution Tax applies at 47%

Distributing to lower-income individuals (such as adult children or a spouse with lower earnings) remains a legitimate and effective strategy — provided the arrangement constitutes ordinary family dealing and the beneficiary genuinely receives the economic benefit.

Your Pre-30 June 2026 Checklist

Here’s a practical action plan for trustees and their advisers:

1. Review your trust deed — confirm distribution powers, eligible beneficiaries, and any early resolution deadlines
2. Estimate trust income — calculate distributable and net taxable income for 2025–26
3. Assess Section 100A risk — ensure proposed distributions reflect genuine family or commercial dealing
4. Draft a clear, written resolution — specify each beneficiary’s entitlement; include streaming directions if applicable
5. Sign and execute by 30 June — no exceptions
6. Manage UPEs to companies — pay out or place on a Division 7A compliant loan before the company’s lodgment date
7. Document everything — retain signed resolutions and supporting records

Don’t Leave It to the Last Minute

With 30 June 2026 just weeks away, now is the time to act. Trust distribution decisions made in haste — or not made at all — can result in significant, avoidable tax bills. The ATO’s compliance focus on trust arrangements is at an all-time high, and the legal landscape around UPEs is shifting.

At TaxServe Australia, our experienced tax advisers work with trustees and business owners to structure distributions effectively, manage ATO compliance risks, and ensure every resolution is valid and documented before the deadline.

Contact TaxServe Australia today to review your trust distribution strategy before 30 June 2026. Don’t let a missed deadline or an invalid resolution cost you thousands.

Sources

1. Australian Taxation Office — Resolutions checklist
2. Australian Taxation Office — Attention all trustees: top 5 EOFY checklist
3. Australian Taxation Office — Tax issues for trusts: tips and traps
4. Australian Taxation Office — Trust taxation – reimbursement agreement (Section 100A)
5. Australian Taxation Office — Practical Compliance Guideline PCG 2022/2
6. Eclipse Advisory — Trust distribution resolutions June 30