Distributing income from a family trust demands clear bookkeeping, sound tax planning and strict adherence to the trust deed from the outset of setting up a family trust. This guide explains how trustees and bookkeepers can record trust income accurately, comply with the Income Tax Assessment Act and meet the Australian Taxation Office requirements, ensuring tax benefits, asset protection and smooth succession planning for future generations.
Understanding Family Trusts and Their Structure
A family trust, sometimes referred to as a discretionary trust, is a legal setup designed to hold assets for family members. Families often choose this arrangement to manage property, share income, and help protect what they own. Typically, a company or appointed person acts as the trustee, handling the trust and providing added security for the assets.
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What Is a Discretionary Trust?
A discretionary trust allows trustees to choose which individual beneficiaries receive trust income and in what proportions. Unlike a fixed trust, there are no fixed entitlements—trustees decide distributions based on the best interests of family members, primary beneficiaries and other beneficiaries named in the trust deed.
Role of the Trust Deed and Settled Sum
The trust deed is the legal document that sets out the trust structure, names the initial trustee, records the settled sum and defines who may benefit. It also specifies how trust assets and business assets are held, how to manage capital gains and what counts as trust income under the Income Tax Assessment Act.
Why Use a Corporate Trustee?
Appointing a corporate trustee or trustee company keeps the trust’s legal documentation consistent and professional. The corporate trustee acts as legal owner of trust assets and holds the trust fund bank account, simplifying tax file number registration, tax returns and compliance with stamp duty and ongoing costs.
Preparing for Income Distribution
Effective bookkeeping begins long before the end of the financial year. By setting up proper systems and engaging a financial adviser early, trustees can minimise tax liabilities, access tax concessions and avoid potential risks.
Setting Up the Chart of Accounts
Create a clear chart of accounts in your accounting software, separating categories for assessable income, other income, capital gains, tax loss and expenses. Include sub-accounts for:
Trust Income
Distribution Payable – Individual Beneficiaries
Franking Credits
TFN Amounts Withheld
Trust Expenses
This breakdown ensures every dollar the trust generates is tracked and can be matched to entries on the trust income schedule at lodgement.
Establishing a Trust Bank Account
Open a dedicated bank account in the name of the corporate trustee. This prevents commingling of family assets and business assets, simplifies reconciliation and supports asset protection by clearly showing trust transactions, including government grants, loan repayments or distributions to extended family members.
Documenting Trustee Resolutions
Trustees must prepare written resolutions before 30 June each financial year to appoint income to beneficiaries. Include:
Date of resolution
Names of beneficiaries (primary and general beneficiaries)
Percentages or fixed amounts for each family member
References to relevant clauses in the family trust deed
Attach these signed resolutions to the trust’s accounting records as legal documentation for audit defence.
Recording Distributions in Practice
Once resolutions are in place, accurate journal entries turn trustee decisions into records that feed into tax returns and help minimise tax liabilities.
Standard Journal Entry for Distributions
For each beneficiary, debit Trust Income and credit Distribution Payable – [Beneficiary Name]. This entry aligns the ledger with the resolution and shows exactly how much each member will pay tax on at their marginal rate.
Mapping to the Trust Income Schedule
When completing the ATO’s trust income schedule:
Record franked dividends under D: Franking Credit
Report assessable capital gains under A: Capital Gains
List other income, such as rental income, under B: Other Income
This mapping ensures that the family trust election, family control test and any streaming of income comply with Division 207-B and Subdivision 115-C requirements.
Paying Tax and Withholding Obligations
Beneficiaries must include their share of trust income on their individual tax returns and pay tax directly to the ATO. If beneficiaries have not provided a tax file number, the trustee may need to withhold tax at higher rates, creating additional deductions in bookkeeping.
Maintaining Compliance and Reducing Costs
Good bookkeeping protects the trust from unintended capital gains tax on sale of assets, stamp duty on property transfers and unexpected tax loss restrictions.
Regular Reconciliation
Reconcile the trust bank account and ledger monthly. Compare bank statements to recorded transactions, review distributions payable and resolve any discrepancies. This practice keeps ongoing costs down and flags issues before the end of the financial year.
Monitoring Tax Concessions and Losses
Track any tax losses carried forward from earlier years, as well as available small business concessions that can apply to a family business held in trust. Ensure that the trust structure retains eligibility for concessions, such as the small business 50% capital gains tax discount.
Reviewing the Trust Deed Annually
Laws change and family circumstances evolve. At least once a year, review the trust deed with a legal adviser or financial adviser. Assess whether the current trust structure still suits financial goals, succession planning and the needs of extended family members.
Holding Assets and Protecting Wealth
Family trusts can hold business assets, property and other investments, safeguarding them from crisis states such as bankruptcy or disputes. Strong record-keeping and asset protection benefits help ensure that trust assets remain available for future generations.
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Advanced Tips for Effective Trust Administration
Beyond core bookkeeping, these strategies help trustees optimise tax benefits and protect the trust.
Streaming Capital Gains and Franked Dividends
When the trust generates capital gains or receives franked dividends, consider streaming these amounts specifically to beneficiaries best placed to benefit from lower tax rates or concessional treatment. Use trustee resolutions that reference the trust deed’s streaming powers to direct capital gain distributions separately from other income.
Making a Family Trust Election
A family trust election locks in which beneficiaries comprise the family group for taxation purposes. Making this election early ensures that distributions to other family members do not attract higher tax rates and that the trust retains access to certain government grants and tax benefits.
Managing Potential Risks
Beware of late-made resolutions, which can result in default tax at the highest marginal rate. Keep clear minutes, attach signed trustee resolutions to each distribution and lodge the trust’s annual tax return on time to avoid penalties.
Succession Planning and Future Generations
Use the flexibility of discretionary trusts to plan for retirement or transfer business assets to the next generation. Draft succession plans that leverage the trust’s ability to protect assets, defer tax, and provide for family members over time.
Conclusion
Distributing income from a family trust combines thoughtful tax planning with careful bookkeeping. By setting up a clear chart of accounts, maintaining separate bank accounts, documenting trustee resolutions and reconciling regularly, bookkeepers ensure that distributions flow smoothly, tax obligations are met, and the trust deed guides every step. Engaging professional advice, reviewing the trust deed annually and making timely family trust elections further strengthen asset protection and support the trust’s long-term goals. With these practical bookkeeping tips, distributing income from a family trust becomes a reliable process that protects family assets and supports financial goals for many families.
