Trusts—whether discretionary, unit, or hybrid—are a key consideration in year-end tax planning for many client groups. Each structure brings different opportunities and obligations, so early attention ahead of 30 June is essential.
Trust Tax Planning – Key Focus Areas for 2025
- Trust Distribution Resolutions
- Valid distribution resolutions must be executed by 30 June 2025 for income allocations to be effective for the 2025 financial year.
- If you plan to distribute to new beneficiaries (e.g. adult children or corporate entities), ensure a Tax File Number (TFN) report has been lodged with the ATO before year-end. Without this, distributions may be subject to TFN withholding at 47%.
- Having clear, validly executed resolutions ensures that entitlements are correctly assigned and that the trust complies with its obligations.
- Section 100A – Updated ATO Guidance on Family Trust Arrangements
- On 23 February 2022, the ATO released final guidance on section 100A of the ITAA 1936, which targets arrangements where a trust distribution is made but someone else receives the benefit—commonly referred to as reimbursement agreements. The final TR 2022/4 and PCG 2022/2 confirm the ATO’s long-held views, mostly consistent with the earlier drafts issued in 2022.
- The PCG outlines Green Zone arrangements, which are considered low-risk and unlikely to attract ATO compliance attention. Examples include:
- Distributions used to benefit the beneficiary (or their spouse/dependents), applied within two years;
- Retained funds used in the working capital of a trustee’s business, for acquiring assets, or lent to associates on commercial terms;
- Specific scenarios such as:
- Testamentary trusts retaining income for minors until age 25
- A parent using trust funds to assist with a home deposit for their adult child
- Trusts distributing to company beneficiaries with tax losses, where the company uses the funds for legitimate business purposes
- In the Guardian AIT case ([2023] FCAFC 3), the ATO failed in applying s100A, but succeeded in using Part IVA, the general anti-avoidance rule, to challenge the arrangement. While a clear definition of “ordinary family or commercial dealing” remains unresolved, the ATO’s win under Part IVA signals its growing willingness to use this provision when s100A is inconclusive.
- Division 7A – Company Beneficiaries
- When distributing trust income to a corporate beneficiary to benefit from lower tax rates, consider the Division 7A implications.
- Where funds remain unpaid (Unpaid Present Entitlement or UPE), they may be treated as a deemed dividend unless repaid, placed under a Division 7A loan agreement, or held in a sub-trust by the due date of the trust’s 2025 tax return.
- Unit Trusts – Specific Considerations
- Unit trusts are commonly used in property and investment structures, offering both flexibility and fixed entitlements.
- Key planning steps include:
- Reviewing the Trust Deed to confirm whether the trust qualifies as a ‘fixed trust’, which affects eligibility for tax concessions
- Ensuring the rules for issuing, redeeming, and transferring units are clear, especially for managing investor changes and determining trust loss measures
- Understanding governance provisions, particularly the process for appointing or removing trustees (usually via unitholder resolutions rather than an appointor mechanism)
- Be mindful of tax timing issues when units are sold mid-year:
- The new unitholder may be taxed on income from the full year, even if they only held the units for part of it
- The former unitholder generally won’t be entitled to income earned before the sale
- These timing issues can often be managed by settling transfers on 1 July, at the start of a new income year.
Need guidance?
If you’d like tailored advice on your trust distributions or want to discuss how any of these updates may apply to your structure, reach out to our team ahead of 30 June.
Coming soon: Part 4 of our Tax Planning Series – A focus on Primary Producers.