A trust is a legal relationship where a trustee holds and manages assets on behalf of one or more beneficiaries. The trust deed is the governing document: it sets out the trustee's powers, who can be a beneficiary, and the rules for distributing income and capital.
Common trust types
- Discretionary (family) trust — the trustee has discretion over how income and capital are distributed among a class of beneficiaries. Widely used for income-splitting and asset protection.
- Unit trust — beneficiaries hold fixed units, similar to shares. Distributions are proportional to unit holdings. Common in property investments and joint ventures.
- Hybrid trust — combines elements of both discretionary and unit trusts.
- Testamentary trust — established under a will; comes into existence on the death of the person who made the will.
Tax treatment
Trusts have an ABN and TFN and lodge their own trust tax return. They do not pay income tax themselves — instead, net income flows through to beneficiaries who pay tax at their own marginal rates. If income is not distributed to a beneficiary by year end, the trustee is assessed on the undistributed amount at the top marginal rate.
Do trusts need to distribute income by 30 June?
Yes. For a discretionary trust to make a valid distribution, the trustee must make a resolution (usually in writing) before 30 June each year. Most trust deeds set this deadline; distributions made after 30 June for the prior income year are generally not valid for that year.