How Family Trusts Are Taxed in Australia
In Australia, a family trust is run by a trustee who decides each year which beneficiaries are entitled to the trust income, and each beneficiary pays tax on their share at their own marginal rate. The trust itself usually pays nothing. Income nobody is entitled to by 30 June is taxed to the trustee at 47%, and distributions to children under 18 are taxed at penalty rates.
Many people set up a family trust expecting the trust itself to pay a lower rate of tax. It does not work that way: the people who receive the trust income pay the tax, each at their own rate, and the resolutions the trustee signs before 30 June decide which rates those are. Miss that date and the top rate applies to the lot.
How a family trust is taxed in Australia comes down to four questions:
- where the income goes
- who is presently entitled to it
- when that entitlement has to be locked in
- what each recipient pays
This guide works through all four, plus the beneficiary rules that catch people out.
The 2026-27 Federal Budget proposed a 30% minimum tax on discretionary trust income from 1 July 2028. It has not been legislated and nothing changes for the current financial year. What it would change is covered at the end of this guide.
How a family trust is taxed in Australia
The tax follows the money. The trustee works out the trust’s net income for the year and decides who is entitled to it, then each beneficiary reports their share in their own tax return and pays tax on it at their own marginal rate. The trust itself is a conduit, not a taxpayer.
A family trust, in almost every case, is a discretionary trust: a trustee holds assets for a defined group of beneficiaries, usually a family, and nobody has a fixed share. Because the trustee chooses the split fresh each year, a family with one spouse on $180,000 and another on $20,000 can vary it in a way a salary never allows. That flexibility is also exactly what the proposed minimum tax is aimed at, covered at the end of this guide.
Present entitlement and the 30 June deadline
This is the part that costs people real money, and it has nothing to do with how the trust performed.
For income to be taxed to a beneficiary rather than the trustee, that beneficiary has to be presently entitled to it. Present entitlement means they have an immediate right to demand their share. The ATO’s guidance on trusts is clear that the right matters, not the cash: the money can stay in the trust bank account and the beneficiary is still taxed on it.
The deadline is 30 June, not the day the return gets lodged. The trustee has to make and document the resolution by the end of the financial year. A resolution written the following March, when the accountant gets to the return, is too late for the year it covers.
If no beneficiary is presently entitled by 30 June, the trustee is assessed on the income under section 99A of the Income Tax Assessment Act 1936, at the top marginal rate of 45% plus the 2% Medicare levy, 47% all in.
If you take one thing from this article, make it a diary entry in early June.
Who you can distribute to, and what each one pays
The trustee’s discretion is only useful if there is more than one sensible recipient. Each type of beneficiary is taxed differently.
| Beneficiary | What they pay on their share |
|---|---|
| Adult Australian resident | Their own marginal rate, including the tax-free threshold if they have little other income |
| A company beneficiary | The company tax rate, 25% for a base rate entity or 30% otherwise |
| Child under 18 | Penalty rates under Division 6AA (see below) |
| Non-resident beneficiary | The trustee is assessed and pays on their behalf |
| Another trust | The income flows through again to that trust’s beneficiaries |
The company row is the one families use as a pressure valve. A company set up purely to receive surplus trust distributions, commonly called a bucket company, caps the tax on that income at the corporate rate instead of the individual top rate. The trade-off is that the money is then inside a company, and getting it out to a person later brings its own rules. That company also lodges its own return each year, which is worth factoring into the running cost of the structure.
Every distribution to an individual lands on that person’s own tax return. In practice that means the trust return and the family’s personal returns have to agree with each other, which is why these returns are best prepared together rather than by three different people.
The minor beneficiary trap
The most common piece of bad advice about family trusts is that you can distribute to your children and use their tax-free thresholds. Division 6AA of the tax law exists specifically to stop that.
For a beneficiary under 18, trust income is “eligible income” and taxed at the penalty rates the ATO publishes in the appendixes to its trust tax return instructions:
| Eligible trust income | Tax |
|---|---|
| Up to $416 | Nil |
| $417 to $1,307 | 66 cents in the dollar on that slice |
| $1,308 and above | 45% on the whole amount |
Some income is “excepted income” and taxed at ordinary rates instead, including income from a deceased estate, income from property transferred to a minor as a result of a death, and a minor’s own employment income.
- Distributions to adult children, even full-time students with no other income
- A minor's own wages from a part-time job
- Income a minor receives from a deceased estate
- Eligible trust income to a minor up to $416
- A meaningful distribution to a child under 18: the rates in the table above apply from $417
- Anything above $416 per child, however many children the total is split across
A token distribution to a child is fine. A meaningful one is a penalty. The year a child turns 18 is usually the year they become genuinely useful as a beneficiary, with one caveat: the entitlement has to be real. Section 100A of the tax law targets arrangements where an adult child is presently entitled on paper while the money stays with someone else, so the benefit has to genuinely reach them.
Capital gains and franked dividends
Trust income keeps its character on the way through, which matters for two common types of income.
Capital gains flow through to the beneficiary, who applies their own capital gains position. An individual beneficiary can generally claim the 50% CGT discount where the trust held the asset for more than 12 months, which is one reason investment assets are often held in a trust rather than a company. A company beneficiary gets no CGT discount at all.
One caveat on the discount itself: the 2026-27 Budget proposed replacing it with inflation indexation and a 30% minimum tax on gains from 1 July 2027. Like the trust minimum tax below, it is announced, not law, and gains realised before that date keep the current treatment.
Franked dividends flow through with their franking credits attached, so a beneficiary on a low marginal rate can end up with a refund of the credits. This is why family trusts holding Australian shares are so common.
- Taxed at their own marginal rate
- 50% CGT discount where the trust held the asset over 12 months
- Franking credits can come back as a refund on a low rate
- Taxed at the company rate, 25% or 30%
- No CGT discount at all
- Getting the money to a person later has its own rules
The trustee can also stream capital gains and franked distributions to particular beneficiaries rather than spreading them proportionally, but only if the deed allows it and the records support it. It is worth having the deed checked before relying on it.
The family trust election and the 47% catch
A family trust election is a declaration the trustee makes to the ATO that the trust is a family trust for tax purposes. It unlocks several concessions, most usefully making it easier to use the trust’s carried-forward losses and to pass franking credits to beneficiaries.
The cost is that the election locks the trust to a specified individual and their family group. Distribute outside that group and family trust distribution tax applies, at the top marginal rate plus the Medicare levy.
That makes it worth knowing whether your trust has made an election, and who the specified individual is, before adding a beneficiary. It is a question a lot of trustees cannot answer about their own trust.
Does a family trust have to lodge a tax return?
Yes, every financial year, even though the trust usually pays no tax. The trustee lodges a trust tax return reporting the trust’s income and how it was distributed, and issues each beneficiary a statement of their share.
The lodgement itself is rarely the hard part. Keeping the numbers consistent across the trust return, any bucket company return and each beneficiary’s personal return is where it goes wrong, particularly when the entities are handled by different people in different months. That is one of the practical arguments for treating the whole structure as a single job: family trust returns start at $660 inc GST with us, with the financial statements and distribution statements included.
Whether a trust is the right structure at all is a separate question from how it is taxed, and it sits alongside the sole trader, company and partnership options that most Australian businesses choose between. The structure comparison is the place to start if you are not certain what you are dealing with.
What the proposed 30% minimum tax would change
This measure is not law. It was announced in the 2026-27 Federal Budget and still has to pass through Parliament, so the detail below can change.
What the Budget papers announced is a minimum tax of 30% on discretionary trust income, applying from 1 July 2028, assessed at the trustee level. Individual beneficiaries would receive a non-refundable credit for the tax the trustee had already paid.
The effect depends entirely on the beneficiary’s own rate. Someone on a marginal rate above 30% would pay the difference as top-up tax, so nothing much changes for them. Someone on a rate below 30%, which is the whole point of distributing to a lower-earning family member, would lose the excess credit. That removes most of the benefit of income splitting through a discretionary trust.
Corporate beneficiaries look worse again. The ATO’s summary of the announcement limits the credit to non-corporate beneficiaries, so a company receiving a trust distribution is not expected to get one, which would mean the same income taxed twice before it ever reaches a person. If that holds through the legislation, bucket company strategies are the hardest hit part of the change.
Several categories are excluded on the Budget papers: fixed trusts, widely held trusts, charitable trusts, special disability trusts and deceased estates. Transitional roll-over relief is also flagged, so trusts can restructure into another vehicle without triggering tax on the way out.
A 30% minimum tax on discretionary trusts, announced but not yet legislated.
Two more financial years are taxed under the existing flow-through model.
The minimum tax would apply from this date if the legislation passes as announced.
The sensible response for now is to do nothing drastic. Two full financial years remain under the current rules and the measure has not been drafted into legislation yet. It is worth understanding your exposure, which is a tax advice conversation rather than a compliance one, and revisiting it when the bill is introduced.
Is a family trust still worth it?
For a household with genuinely different income levels across two or more adults, the flexibility still works today, and the asset protection sits outside the tax question entirely. For a single earner with no one meaningful to distribute to, a trust is often several hundred dollars a year of compliance in exchange for very little.
The running cost is real and worth counting properly: a trust return, plus a company return if there is a bucket company, plus personal returns for every beneficiary who receives income. That is a multi-entity engagement, and it sits at the higher end of what a business tax return costs in Australia.
Quick answers
Does a family trust pay tax in Australia?
Usually not. A family trust is not a separate taxpayer the way a company is. The trustee distributes the trust income to beneficiaries each year, and each beneficiary pays tax on their share at their own rate. The trustee is only assessed on income that nobody is presently entitled to.
What happens if a family trust does not distribute its income before 30 June?
If no beneficiary is presently entitled to the income by 30 June, the trustee is assessed on it under section 99A of the Income Tax Assessment Act 1936 at 47%, the top marginal rate of 45% plus the 2% Medicare levy. It is the most expensive outcome available to a family trust, and it is usually caused by a missing resolution rather than anything to do with how the trust performed.
How much can a family trust distribute to a child under 18?
Very little before penalty rates apply. Under Division 6AA, a minor beneficiary pays no tax on eligible trust income up to $416, 66% on the slice between $417 and $1,307, and 45% on the whole amount once it reaches $1,308. Excepted income, such as income from a deceased estate, is taxed at ordinary rates instead.
Does a family trust have to lodge a tax return every year?
Yes. The trustee lodges a trust tax return for each financial year showing the trust income and how it was distributed, even though the trust generally pays no tax itself. Beneficiaries then report their share in their own returns, and the two need to agree.
Is the 30% minimum tax on discretionary trusts law yet?
No. It was announced in the 2026-27 Federal Budget to start from 1 July 2028 and still has to pass through Parliament. Nothing changes for the current financial year, and the detail can shift before it is legislated.