Understanding the Trust Tax Rate in Australia

Trusts are popular with Australian small businesses because they can offer flexibility for profit distributions and help with asset protection. But when it comes to “how much tax does a trust pay?”, the answer depends on who is entitled to the trust’s income and whether you’ve set things up correctly.

In this guide, we’ll unpack the trust tax rate in Australia in plain English, explain when different rates apply, and highlight common traps that can push a trust into higher-tax territory. We’ll also cover the legal documents and compliance steps you’ll need to keep your structure running smoothly.

If you’re weighing up whether a trust suits your business or investment structure, don’t worry - with the right setup and ongoing processes, you can manage risk and avoid unnecessary tax surprises.

What Is A Trust And How Is It Taxed In Australia?

A trust is a legal relationship where a trustee holds and manages assets for beneficiaries according to a trust deed. Many business owners choose discretionary (family) trusts or unit trusts for flexibility or investor clarity. From a legal perspective, trusts are powerful tools for asset protection and tax planning, provided they’re used properly.

Unlike a company, a trust itself generally isn’t taxed like a separate taxpayer on its net income. Instead, the tax tends to “flow through” to beneficiaries who are made presently entitled to the income by year end, and they pay tax at their own rates. If the trustee fails to make valid beneficiary entitlements, or certain special situations apply, the trustee can be assessed instead - often at penal rates.

Practically, this means two things matter most for your tax outcome each year:

• Who the trust makes “presently entitled” to specific categories of income (ordinary income, capital gains, franked dividends), and
• Whether your trust deed and resolutions allow you to stream those categories to different beneficiaries correctly.

To use a trust, you’ll need a TFN and, where relevant, an ABN and GST registration. The specifics vary by activity, so it’s worth confirming the core trust registration requirements early.

What Are The Trust Tax Rates In Australia?

The phrase “trust tax rate” is a bit misleading. Trust income is usually taxed to beneficiaries at their own marginal rates - unless the trustee is assessed. Below is a plain‑English snapshot of how the rates typically work.

Beneficiaries Who Are Presently Entitled

• Adult resident beneficiaries: They pay tax at their personal marginal rates on the distributions they receive or are made presently entitled to.
• Company beneficiaries: The company pays at company rates (commonly 25% for base rate entities, or 30% for others). Using a company beneficiary can cap the rate, but take care around unpaid present entitlements (UPEs) and Division 7A risks (explained below).
• Non-resident beneficiaries: They’re generally taxed at non-resident rates on Australian‑sourced income; different rules can apply to capital gains on taxable Australian property.
• Minors: Special “unearned income” rules apply to minors, which can mean higher tax on passive income unless it qualifies as “excepted income.” In many cases, the trustee is assessed on a minor’s share at rates that reflect those special rules.

Trustee Assessment At Top Rates

• No beneficiary presently entitled (or invalid resolutions): If no one is presently entitled to all or part of the income by 30 June (or if the resolution doesn’t comply with your deed), the trustee is commonly assessed on that income at the top individual rate (often summarised as 47% including levies at the time of writing).
• Certain other cases: For example, where a beneficiary is under a legal disability (like a minor), the trustee can be assessed on that share at rates applicable to that beneficiary’s circumstances.

The takeaway: most trusts don’t have a single fixed “trust tax rate”. The rate depends on who is taxed - the beneficiary or the trustee - and the beneficiary’s own tax profile. Good governance and valid resolutions are what keep you out of the penal rate column.

How Do Distributions Change The Tax Outcome?

The way you distribute (or “appoint”) trust income has a direct impact on tax. Your trust deed sets the rules, and your resolutions must be valid and on time. Here’s how the main categories play out.

Ordinary Income (Business Profits, Interest, Rent)

In a discretionary trust, you can generally choose which beneficiaries are presently entitled to ordinary income each year, and their own tax rates will apply. If no one is made presently entitled to a portion, the trustee may be hit with top rates on that portion.

Capital Gains

Trusts can distribute capital gains to beneficiaries. If beneficiaries are eligible individuals and the trust deed allows, the 50% capital gains discount can flow through. You can often stream capital gains to specific beneficiaries, but only if your deed permits and your resolution clearly identifies the amounts and the beneficiaries. Where assets are transferred out of a trust directly, consider whether an in specie distribution is triggered and what tax and duty consequences follow.

Franked Dividends

Franked dividends carry franking credits. If your deed and resolutions support it, you can stream franked income and associated credits to specific beneficiaries so the credits are usable by the right person. If you mis‑stream or fail to create present entitlement correctly, the credits may be lost and the trustee could be assessed instead.

Retention vs Distribution

If a trust “retains” income (meaning no beneficiary is made presently entitled), the trustee commonly pays tax at top rates on that amount. Unlike a company, there’s no general “flat trust rate” for retained income. For this reason, many trusts aim to distribute income annually to avoid high trustee assessments.

Using A Company Beneficiary

Some family groups distribute part of the trust’s profit to a private company to access the company tax rate. That can be effective, but be mindful of UPEs (amounts the company is entitled to but not actually paid). These can trigger Division 7A issues if not managed with a complying sub‑trust or repayment strategy. This isn’t a reason to avoid companies altogether - just a reminder that documentation and cashflow planning matter.

Family Trust Elections, Streaming And Common Pitfalls

Family trusts come with extra planning options - and extra traps. Here are the ones small business owners most often ask us about.

Family Trust Elections (FTE)

Many businesses make a Family Trust Election to access certain loss and franking credit rules. Once you’ve made an FTE, distributions should be confined to “family group” members to avoid Family Trust Distribution Tax (FTDT), which is imposed at a penal rate (often described as 47%). This tax can apply if you distribute outside the defined family group, or if interposed entities receive income without the right elections in place.

Family Trust Distribution Tax (FTDT)

FTDT can catch business owners by surprise. If the trust with an FTE makes a distribution to someone outside the family group (or to an entity that hasn’t made an interposed election where required), FTDT may apply to the trustee. It’s critical to map your family group and check the definitions before finalising resolutions.

Streaming Rules

Under Australia’s streaming rules, you can direct capital gains and franked dividends to specific beneficiaries if your deed allows and your resolution is precise. Sloppy or late resolutions can cause mis‑streaming - with real tax costs, including loss of franking credits or trustee assessments at top rates. It’s wise to review your deed annually to ensure it supports the streams you intend to make.

Minors And Unearned Income

Distributions to minors (under 18 at year end) are subject to special “unearned income” rules that often lead to higher tax on passive income. There are exceptions (for example, certain employment‑related or deceased estate income), but generally, large passive distributions to minors aren’t tax‑effective. If minors are part of your planning, model the tax impact up front.

Using Trusts To Hold Company Shares

It’s common for a trust to hold shares in a trading company. This can help with asset protection and provide flexibility when paying dividends to the trust, which can then distribute to beneficiaries. For a deeper look at how this works in practice, see our guide on beneficially holding shares through a trust.

Setting Up And Running Your Trust: Legal And Compliance Essentials

Tax outcomes hinge on getting the legal setup right, then keeping your compliance tight each year. Here’s a checklist of the essentials from a legal perspective (we’ll leave the detailed tax calculations to your accountant, but these steps support the tax position you want).

1) Get The Trust Deed Right

The trust deed is the rulebook. It should clearly allow discretionary distributions, capital gains and franking credit streaming (if desired), and corporate beneficiaries (if you plan to use them). Because it’s a deed, execution requirements matter - see our overview of what a deed is under Australian law and when wet ink vs electronic signatures are acceptable for execution. If you’re amending the deed, ensure variations are done correctly to avoid resettlement risks.

2) Obtain Registrations And IDs

Apply for a TFN for the trust and, if you carry on an enterprise, an ABN and GST registration. Make sure your trustee entity is properly set up and that your trust’s details are consistent across registrations. For the nuts and bolts, check the trust requirements around ACN, ABN and TFN.

3) Annual Trustee Resolutions (On Time, And In The Right Form)

Before 30 June, pass resolutions that comply with the deed and clearly set out who is presently entitled to ordinary income, capital gains and franked amounts. If you intend to stream categories, say so. Late or ambiguous resolutions are a common reason trustees end up assessed at top rates. Keep signed copies on file - a simple gap in records can be costly.

4) Consider Family Trust Elections (If Useful)

If you’re utilising franking credits or loss rules that require an FTE, lodge the election and stick to distributions within the family group. If you plan to distribute to an interposed company or trust, consider whether an interposed election is needed to avoid FTDT exposure. These are quick conversations that can prevent a 47% problem later.

5) Manage Company Beneficiaries And UPEs

Where a company is made presently entitled but not paid in cash, address the UPE with a complying sub‑trust or repayment approach to manage Division 7A risk. Your accountant will help with the numbers; your job is to ensure the deed allows the distribution and that your documentation reflects the chosen strategy.

6) Keep Your Records Tight

Maintain a resolution file, beneficiary TFNs (as required), distribution statements, dividend and CGT schedules, and bank/payments evidence. If you transfer assets to beneficiaries, confirm whether it’s an in specie distribution and check stamp duty/CGT implications. Good records protect your tax position and make year‑end much faster.

7) Understand Beneficial Interests

Beneficiaries have equitable interests, not legal title, which is why the trustee’s role and the deed’s terms matter so much. If you want a refresher on the concepts behind those rights, our guide to equitable interests explains how they arise and why clarity in your documents is essential.

8) Plan For Business Growth And Exit

Trusts are flexible when your business evolves - for example, you might add a company beneath the trust or alter distribution patterns. If you’re moving assets out of the trust or restructuring, build in time for deed reviews and tax checks. If the trust will hold or receive shares in a company, ensure your governance documents align - company constitutions and distribution mechanics should play nicely with the trust’s rules.

Common Documents You’ll Likely Need

• Trust Deed (and any Deed of Variation): Sets the distribution powers, streaming rules and beneficiary classes.
• Trustee Resolutions: Annual distribution and streaming decisions documented before 30 June.
• Corporate Documents (if using a company beneficiary): Constitution, director resolutions and dividend statements aligned with trust distributions.
• Loan/Sub‑Trust Documents: Evidence of how UPEs are managed to address Division 7A risk.
• Shareholding/Investment Records: If your trust holds business shares, keep evidence of acquisitions, dividends and CGT positions, aligned with beneficial holdings.

If you’re establishing your trust now, it’s worth mapping how profits, capital gains and franked dividends might be handled over the next few years. This ensures your deed is drafted to support the outcomes you want - not just in year one, but as the business grows.

Key Takeaways

• There is no single “trust tax rate” - trusts usually pass tax to beneficiaries at their rates, and trustees are only assessed (often at top rates) when entitlements aren’t validly made or special rules apply.
• To control your effective trust tax rate, ensure timely, valid resolutions that make beneficiaries presently entitled and, where allowed, stream capital gains and franked dividends correctly.
• Family Trust Elections can unlock benefits but bring Family Trust Distribution Tax risks if you distribute outside the family group or forget interposed entity elections.
• Company beneficiaries can cap rates, but unpaid present entitlements need careful Division 7A management and clear documentation.
• Get the legal foundations right - the trust deed, execution, registrations and annual governance - so the tax position you plan actually holds up in practice.
• If you’re holding or distributing assets, consider whether an in specie distribution arises and what duty/CGT consequences follow.
• A short review of your deed and processes each year can prevent mis‑streaming, lost franking credits and unexpected trustee assessments at top rates.

If you’d like a consultation on setting up or reviewing a trust for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.