A discretionary trust gives you flexibility over who receives income each year. That flexibility comes with one hard condition: the trustee must actually exercise the discretion, in the right form, before the financial year ends. Miss it and the tax outcome is decided for you — almost always badly.
What is a trust distribution resolution?
It is the trustee's formal decision recording which beneficiaries are presently entitled to the trust's income for that year, and in what shares. That entitlement is what determines who is assessed on the trust's taxable income. The trust itself generally does not pay tax on income it distributes; the beneficiaries do, at their own rates. The resolution is the bridge between the two, and it must operate within the terms of the trust deed.
When does the resolution have to be made?
By 30 June of the year in question, unless the deed sets an earlier date — and some deeds do. This trips up trustees who think of trust work as something that happens when the accounts are prepared in October. By then it is too late to decide who was entitled for the year that closed in June. The decision is prospective in form even though the exact income figure is not yet known, which is why well-drafted resolutions use percentages or ordered priorities rather than fixed dollar amounts.
What happens if the deadline is missed?
Two possibilities, neither good. If the deed names a default beneficiary, the income falls to them automatically — often a person or entity that was never the intended recipient and may be on a high marginal rate. If there is no default and no beneficiary is presently entitled, the trustee is assessed on the income at the top marginal rate. Either outcome wastes the flexibility the structure was set up to provide, and it cannot be fixed retrospectively by preparing a resolution later and dating it back.
Does the resolution need to be in writing?
Strictly, writing is not always required, but treat it as if it is. A signed resolution dated on or before 30 June is the only reliable evidence that the decision was made in time. If the ATO reviews the trust, or a family dispute arises years later, an oral decision nobody documented is effectively unprovable. Keep the signed resolution with the trust's permanent records alongside the deed and any variations — record retention for trusts is a long-term obligation, not a five-year one.
Who can the trust actually distribute to?
Only beneficiaries within the class defined by the deed. That class is usually broad in a family trust, but it is not unlimited, and distributing outside it is invalid regardless of intention. If the trust has made a family trust election, distributions outside the specified family group attract family trust distribution tax at the top marginal rate plus Medicare levy — an expensive mistake that occurs when a new entity is brought into the group without checking. Our guide to setting up a family trust explains how the beneficiary class is defined at the outset.
What else should a trustee check each year?
Whether the deed requires anything specific in the resolution's form or timing. Whether streaming of franked dividends or capital gains is intended, since that requires the resolution and the trust's records to identify those amounts separately. Whether any adult beneficiaries have unpaid present entitlements from earlier years that need attention. Whether minor beneficiaries are involved, given that unearned trust income for minors is taxed at penalty rates above a low threshold. And whether the distribution reflects a genuine benefit to the named beneficiary, because arrangements where the money is enjoyed by someone else remain squarely within the ATO's focus.
How should trustees prepare for the deadline?
Start the conversation in May, not June. Estimate the trust's income for the year, review each potential beneficiary's expected tax position, and consider other items that interact — a beneficiary's super contributions, an expected capital gain, a spouse's return to work. Then have the resolution drafted, checked against the deed, signed, and dated before the end of the month. It is a short document that carries a very large tax consequence, and there is no second chance at it.
Trust resolutions are quick to prepare and costly to forget. The Metier Group prepares and reviews annual distribution resolutions for Perth families and business groups through our trust services. Contact us well before June so your trust's income ends up where you intend it to.