Family trusts remain a favoured structure for Australian families and small businesses because they combine flexibility in distributing income with asset protection benefits. Yet many trustees and beneficiaries still ask one big question in 2026. Who actually pays the tax on those distributions. The short answer is usually the beneficiary. The longer answer brings in present entitlement rules, the Family Trust Election framework, the forty seven per cent Family Trust Distribution Tax risk, and an upcoming proposal for a minimum thirty per cent tax from July twenty twenty eight. This guide walks through the current law, the traps that lead to unexpected forty seven per cent bills, and what the proposed reform means for planning in the years ahead.
How the ordinary rules tax family trust distributions
Under Division Six of the Income Tax Assessment Act nineteen thirty six, a trust works on a flow through basis. Each income year the trustee calculates the net income of the trust as if the trustee were a resident taxpayer. That net income is then allocated to beneficiaries who are presently entitled by thirty June. Present entitlement means the beneficiary has an immediate right to demand payment, even if cash never leaves the bank account.
When a beneficiary is presently entitled, the tax law treats that beneficiary as receiving the relevant slice of trust net income. The beneficiary includes the share in the personal tax return and pays tax at the marginal rate that applies to the beneficiary’s overall income. An adult on the thirty seven per cent bracket therefore pays thirty seven per cent plus Medicare levy on the trust income. A company beneficiary normally pays twenty five per cent if it qualifies as a base rate entity, otherwise thirty per cent.
Capital gains made by the trust can also flow through to beneficiaries, provided the trustee resolution identifies the gain. The beneficiary can then apply the general fifty per cent discount if an individual owned the relevant asset for at least twelve months, or the one third discount that companies do not receive. Franked dividends can likewise be streamed to particular beneficiaries where the deed and resolution allow, giving those beneficiaries franking credits.
The practical outcome under the ordinary rules is that the trust itself often pays no income tax. Instead, the beneficiaries carry the burden, matching the progressive system that applies to wages and other income.
When the trustee becomes the taxpayer
Not every distribution lands with a beneficiary. Sometimes the trustee fails to make an effective resolution by thirty June. Sometimes the distribution goes to a beneficiary who is a non resident or is under eighteen, which limits the present entitlement. In such situations the trustee can be assessed on part or all of the trust net income. The rate is punishing. The trustee pays tax on behalf of non resident beneficiaries at the top marginal rate for individuals plus Medicare levy. For minors the trustee pays at penalty rates that start at forty five per cent on the first taxable dollar.
A similar issue arises for undistributed income. If the trust deed does not create present entitlement by year end, the trustee becomes liable at the top marginal rate plus Medicare levy. That rate currently sits at forty seven per cent. The harsh rate acts as a stick, encouraging trustees to decide who should be taxed before the clock strikes midnight on thirty June.
Losses show another limitation. Trust losses cannot be distributed. They stay trapped in the trust and can only be applied in a later year if the trust satisfies statutory tests that prevent trafficking in losses.
Understanding Family Trust Elections and the family group concept
A trustee can lodge a Family Trust Election using the official ATO form, specifying a test individual. Once the election takes effect, the trust becomes a family trust for tax purposes and a defined family group attaches to that trust. Broadly the family group includes the test individual, the spouse, children under eighteen and a wider circle of relatives plus related entities that make Interposed Entity Elections.
Why bother making the election. The main advantage is access to concessional trust loss provisions that make it easier for the trust to use carried forward losses or for companies to trace their losses through the trust. The election can also help retain franking credits and simplify some reporting obligations.
The cost of the election is that any distribution made outside the family group becomes subject to Family Trust Distribution Tax. The concept is simple. Concessions are available if the trust behaves like a family arrangement. Break that arrangement and a forty seven per cent tax signals the breach.
Family Trust Elections are essentially irrevocable. The trustee therefore needs to weigh the long term consequences very carefully. A marriage breakdown that splits the family group or a change in the intended succession plan can suddenly turn routine distributions into an FTDT event.
Family Trust Distribution Tax explained in plain language
Family Trust Distribution Tax applies whenever a family trust or a related entity that has made an Interposed Entity Election confers a present entitlement, pays money, lends money, forgives a debt, or transfers property to someone outside the family group. That outsider could be a cousin, a friend, a private company that did not make an election, or even another trust.
FTDT is levied at the same top marginal rate plus Medicare levy that applies to trustees taxed on undistributed income. The trustee must lodge an FTDT return and pay the tax by the twenty first day of the following month. The Commissioner has no discretion to waive the liability. Even if the distribution was accidental, the tax still bites.
The breadth of what counts as a distribution surprises many trustees. An interest free loan can be a distribution. A credit to a beneficiary account that never converts into cash can be a distribution. A forgiven debt can also be a distribution. The ATO makes it clear that substance beats form.
Common missteps that trigger FTDT
A review of ATO public rulings and recent tax disputes highlights the situations that most often lead to FTDT assessments.
First, trustees sometimes name an entity as a beneficiary in the deed without realising that the entity never joined the family group through an election. When the trust pays that entity, FTDT applies even if that entity is wholly owned by family members.
Second, some family groups restructure by adding companies or trusts for asset protection or estate planning. Unless each new entity makes an Interposed Entity Election, any distribution can breach the family group boundary.
Third, undocumented loans and unpaid present entitlements to adult children living overseas are common. The children may still be part of the family group but their foreign residency means the trustee should check both Division Six residents rules and the FTDT outsider test.
Fourth, trustees who allow a partner of a family member to receive funds without a formal in law relationship recognised in the definition of family group can unintentionally wander outside the safe zone.
FTDT also interacts with section one hundred A reimbursement agreement rules. Where a distribution is made with an arrangement for someone else to enjoy the economic benefit, the Commissioner may cancel the beneficiary assessment and tax the trustee. The result is often a combination of FTDT and section one hundred A adjustments, leading to very high effective tax rates.
ATO compliance focus in 2026
The ATO has ramped up scrutiny on trust distributions, publishing fresh guidance on section one hundred A and indicating that Taskforce officers will review unpaid present entitlements treated as loans. For family trusts with elections in place, the regulator is also running data analytics to identify distributions to entities with no election.
To encourage voluntary disclosures, the ATO has offered remission of up to eighty per cent of General Interest Charge where the trustee discloses FTDT shortfalls before thirty one December twenty twenty six. That incentive recognises the complexity of past arrangements and aims to draw taxpayers into compliance before more intense audit activity begins.
From the twenty twenty five to twenty twenty six income year, the trust tax return includes extra labels requiring the trustee to disclose whether a Family Trust Election or Interposed Entity Election is in force and to provide the tax file number of the specified individual. Enhanced prefill and cross matching mean that inconsistent reporting across the group is more likely to trigger a review.
Where the proposed minimum thirty per cent tax fits in
The Federal Budget released on twelve May twenty twenty six announced a plan for a minimum thirty per cent tax on discretionary trusts, slated to start on one July twenty twenty eight. While the measure is not yet law, the broad outline is now public. Trustees of discretionary trusts would pay a direct thirty per cent tax on the trust taxable income. If the beneficiaries personal marginal rate exceeds thirty per cent, they would receive a non refundable credit for the thirty per cent already paid. Company beneficiaries would not receive a credit. The proposal aims to curb income splitting to beneficiaries with low or nil taxable income.
Several exclusions are flagged. Fixed trusts, widely held trusts, superannuation funds, charities, deceased estate trusts and income from primary production appear carved out. Transitional rollover relief for three years from one July twenty twenty seven would let families restructure into companies or fixed trusts without immediate tax cost.
Because the measure remains a proposal, trustees should monitor consultation papers and draft legislation. No binding action is required yet. That said, family groups intending to rely on low tax adult children after twenty twenty eight may need to revisit the distribution strategy or consider corporate beneficiaries that can use the thirty per cent rate efficiently.
Ordinary distribution tax versus FTDT versus proposed minimum tax
The following table compares three possible scenarios for a one hundred thousand dollar distribution in the twenty twenty six income year. The beneficiary is an adult resident individual on the marginal rate shown.
| Scenario | Who pays tax | Rate applied | Cash left after tax |
|---|---|---|---|
| Ordinary distribution to beneficiary on marginal rate of 34.5 per cent including Medicare levy | Beneficiary | 34.5 per cent | 65,500 |
| Distribution outside family group where FTDT applies | Trustee | 47 per cent | 53,000 |
| Hypothetical minimum tax in place and beneficiary marginal rate is 19 per cent | Trustee pays 30 per cent, beneficiary gets no refund because rate lower than 30 per cent | 30 per cent | 70,000 |
The table shows the immediate impact of FTDT. Losing nearly twelve and a half thousand dollars compared with the ordinary outcome highlights why family trusts need strict compliance. The hypothetical minimum tax would sit between the two extremes for lower income beneficiaries but would reduce arbitrage where adult children at marginal rates below thirty per cent currently receive distributions.
Practical planning steps before thirty June
Effective trust administration relies on timely resolutions, accurate beneficiary records and awareness of the family group boundaries. Trustees should confirm the trust deed allows streaming where intended, prepare written resolutions before thirty June and ensure all intended recipients are inside the family group if a Family Trust Election exists. They should review unpaid present entitlements and document loan terms to avoid Division Seven A issues when corporate beneficiaries are involved.
Year end checklists also need to note any change in the family, such as marriages, divorces or the incorporation of new entities. A change may demand an Interposed Entity Election or trigger the need to revisit who remains within the defined family group. Trustees who discover a historical distribution to an outsider should consider the ATO amnesty on General Interest Charge and lodge a voluntary disclosure.
What has changed in twenty twenty six
While the legislative framework for FTDT has remained steady since nineteen ninety four, twenty twenty six saw several updates that affect practical compliance. The trust tax return now collects more data on elections. The ATO published finalised guidance on reimbursement agreements and released additional tax alerts on unpaid present entitlements to corporate beneficiaries. The government also announced the forthcoming minimum tax proposal, signalling continued political interest in trust reform. These developments create a heightened environment for review and record keeping.
Frequently asked questions
Do family trusts pay tax in their own right
Generally no. Where income is distributed the beneficiaries include the income in their own returns. The exception is when the trustee is assessed on income for non resident beneficiaries, minors or undistributed amounts.
What rate applies to undistributed income in a family trust
The trustee pays tax on undistributed net income at the top marginal rate for individuals plus Medicare levy, which totals forty seven per cent in twenty twenty six.
What exactly triggers Family Trust Distribution Tax
FTDT applies when a family trust with a Family Trust Election, or a related entity with an Interposed Entity Election, confers any distribution, entitlement, payment, loan, property transfer or debt forgiveness to someone outside the defined family group.
Is FTDT different from section one hundred A
Yes. FTDT taxes distributions to outsiders at forty seven per cent, while section one hundred A allows the Commissioner to disregard a distribution to a beneficiary involved in a reimbursement agreement and tax the trustee instead. They can overlap but serve different anti avoidance aims.
Can a trustee reverse a Family Trust Election
Only in very limited cases, such as when the election was made by fraud or mistake and within a short statutory window. For practical purposes, the election is permanent.
Does the proposed thirty per cent minimum tax apply now
No. It is an announced reform slated for commencement on one July twenty twenty eight. Legislation has not yet passed and details, including collection mechanisms, remain open for consultation.
Will corporate beneficiaries still make sense under the proposed reform
Possibly. The proposal currently says corporate beneficiaries will not get a credit for the thirty per cent already paid by the trustee, which may reduce the benefit of using companies purely for rate arbitrage. Each family group will need to run the numbers once draft legislation is clear.
How does the ATO identify potential FTDT breaches
The regulator cross matches trust tax returns, beneficiary tax file numbers and election data. Payments to entities without elections or to individuals whose tax returns do not show corresponding income are red flags. Bank data and related party loan disclosures also feed the risk models.
Closing thoughts for trustees and advisers
Family trusts continue to offer flexibility for wealth management and succession. That flexibility, however, sits within a complex tax framework that relies on present entitlement, clear elections and strict accountability for distributions outside defined family boundaries. In twenty twenty six the main compliance pressure points are the forty seven per cent Family Trust Distribution Tax and the ATO focus on section one hundred A and unpaid present entitlements. Looking ahead, the proposed minimum thirty per cent tax signals a policy direction that may reshape distribution strategies by twenty twenty eight.
Action now means reviewing the trust deed, confirming who counts as family group, documenting resolutions before thirty June and rectifying any historical slips under the current ATO amnesty. With considered planning, trustees can continue to enjoy the benefits of the trust structure while keeping clear of the costly traps that leave so many with unexpected forty seven per cent tax bills.
