With 30 June fast approaching, this end of financial year brings added complexity due to recent legislative changes, Court decisions and ATO guidance. Over the next week, we’ll highlight key updates and considerations to help ensure your EOFY is in order and you’re set up for the year ahead, including:
- 30 June trust distributions: from Carter to Bendel, we’ll cover how recent cases and ATO guidance have reshaped how trust distributions should be approached, including the importance of documentation, the treatment of unpaid entitlements, and the use of corporate beneficiaries.
- Professional profits: the implications of PCG 2021/4 on the allocation of professional profits, which is relevant to all entities now that the transition period has ended.
- EOFY and checklist: covering the key items including Division 296, changes to deductibility of interest charges, company admin tasks, TPB obligations, and lodgement timelines.
Please read on for our first instalment on 30 June trust distributions.
30 June trust distributions
Now more than ever, it is important to be clear about who receives trust distributions. Getting it wrong can cause major issues down the track.
Key matters to keep in mind when finalising your trust distributions include:
🚩 A trust distribution is effectively irrevocable.
Following the 2022 decision of the High Court in Carter,[1] a beneficiary cannot disclaim a distribution after 30 June of the year in which the distribution was made. This is the case regardless of whether the beneficiary could reasonably have been aware of the distribution by 30 June, and whether the value of the taxable income distributed is later increased following an audit (for example).
Advisors and Trustees should very carefully identifying the members of a class of beneficiaries that they intend to distribute to, as well as the default beneficiaries (if any), regardless of the amount of income that a trust has received (or is expected to receive) for the financial year. It may also be wise to let the beneficiary know about the intended distribution, but be mindful of section 100A (explained below).
The decision in Carter is summarised here.
🚩 Distributions to adult children and related entities, and the need for records.
Over the past several years, the ATO has focused on the application of section 100A and in particular, the limits of the exclusion for ordinary family and commercial dealing and its application to distributions from family trusts to adult children and related entities. The ATO released its position on section 100A and ordinary family or commercial dealings in 2022, in TA 2022/1, TR 2022/4 and PCG 2022/2, and cases under section 100A were brought to the Court in Guardian2 and BBlood.3
Now, one of the ATO’s key considerations is recordkeeping. While they acknowledge the informality of family dealings, the ATO expects clear records showing how the funds were actually used on an adult child or related entity. A lack of records isn’t necessarily a legal problem on its own, but it will draw the ATO’s attention and ultimately, put the trust in a very difficult position to meet its onus of proof before a Tribunal or Court.
See our discussion of section 100A, the legislation, ATO rulings and cases here.
🚩 The family group for family trust election purposes.
If a family trust has made a family trust election:
- the trust may be able to carry forward losses or distribute franking credits, but
- the class of beneficiaries is limited to family members or interposed entities that pass the family control test with reference to a test individual.
If a distribution is made to an entity outside of the family group, family trust distribution tax (FTDT) is imposed on the trustee (or director of a corporate trustee) in respect of the distribution, which is taxed at the top marginal tax rate.4
In addition to the ATO’s focus on sections 100A and 99B, it is now also directing attention to family trust elections and FTDT. Critically, there is no time limit for the ATO to assess for FTDT.
It is crucial to consider whether a trust is part of a family group, and the relationship of the beneficiary to the test individual. This isn’t a risk that fades over time, it will remain a live issue for as long as the trust is in place.
🚩 Unpaid present entitlements to associated companies.
The decision in Bendel has attracted much attention.5 The Administrative Appeals Tribunal and the Full Federal Court of Australia found that the ATO’s long-held view is incorrect – an unpaid present entitlement between a company and a trust is not a financial accommodation per section 109D of Division 7A, and therefore not a deemed unfranked dividend to the trust.
Despite these findings, the ATO have issued an Interim Decision Impact Statement and stated that they will continue to administer Division 7A according to their view, not the law as stated by the Full Federal Court, subject to the outcome of their application for special leave to the High Court of Australia. Special leave was granted on Thursday, 12 June, with any final decision likely months away.
At year end, trustees may face a difficult choice: whether to distribute to a company (potentially creating an unpaid present entitlement) or to direct the distribution elsewhere. Fortunately, if a distribution is made to a company, the decision to put a UPE on Division 7A compliant loan terms need not be made immediately, however time limits do apply.6 Ultimately, the decision of where to distribute should be made in light of Subdivision EA of Division 7A, each of the matters set out in this summary and all matters relevant to the individual trust.
The ATO has also flagged its intention to apply section 100A.
See our discussion of Bendel here and our next articles regarding the practical considerations for Division 7A and funds borrowed from a company throughout the financial year.
🚩 Is it too late to incorporate new beneficiary bucket companies to receive franked distributions?
The 45 holding period rule provides that a shareholder must hold shares for at least 45 days to allow the shareholder to access franking credits on a franked dividend.
The ATO has recently flagged that their view is that if a franked dividend is declared to a trust and later distributed to a corporate beneficiary (or another trust, or a new born individual), it does not matter how long the trust has held the share at risk, the beneficiary who ultimately becomes entitled to the franked dividend must itself have notionally held the shares at risk for at least 45 days. I.e. the company must have been incorporated at least 45 days before the trust resolves to distribute the franked dividend to the company.
Although the legal basis for the ATO’s position may be in question, it is clear that the ATO are actively asking questions and pursuing this matter. Based on the ATO’s view, it is too late to incorporate a company now to receive a distribution in the 2025 financial year, regardless of whether the company was already contemplated as part of a transaction or restructure if it has not yet been incorporated.
🚩 Distributions from non-resident trusts, or previously non-resident trusts.
Australian residents who receive distributions from a non-resident trust may be subject to tax under section 99B. Further, a distribution through an interposed Australian resident trust or even from a trust which was a non-resident and subsequently became resident may be subject to tax under section 99B. On that basis, it is crucial to trace the source of the distribution back to the deepest level of trust, and to know the history of that trust.
In TD 2024/9 and PCG 2024/3, the ATO considered the application of section 99B and identified record keeping requirements, some of which appear impractical.
The key message, however, is that a beneficiary (or trustee of an interposed trust) should make reasonable endeavours to trace the distribution and request records which establish the original source of the distribution in the non-resident trust. According to the ATO, it is not enough to accept a non-resident trustee’s statement that a distribution is capital.
If you have received a distribution from a trust which is currently or was previously a non-resident and would like to understand the tax implications of that distribution, please contact our Team.
🚩 Foreign property distributed to foreign beneficiaries.
In 2021, the Full Federal Court of Australia in Greensill7 confirmed that if an Australian resident discretionary trust sold a foreign asset (i.e. non-taxable Australian property) and distributed the capital gain to a foreign beneficiary – the income is subject to capital gains tax in Australia.
Trustees and advisers need to be aware that the law in respect of discretionary trusts selling foreign assets and distributing the capital gain to a foreign resident beneficiary is different from other taxation, and the trustee will be taxed on the gain at the top marginal rate, unlike:
- if an Australian resident fixed trust distributes a capital gain made on a foreign asset to a non-resident beneficiary, it is not subject to capital gains tax; and
- if a non-resident individual directly owned a foreign asset which it sold, the asset would not be subject to Australian capital gains tax.
See our discussion regarding Greensill in our Alert here.
1 Commissioner of Taxation v Carter [2022] HCA 10.
2 Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619 and Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3.
3 BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 and B&F Investments Pty Ltd ATF Illuka Park Trust v Commissioner of Taxation (2023) 298 FCR 449.
4 Family Trust Distribution Tax (Primary Liability) Act 1998 (Cth).
5 Commissioner of Taxation v Bendel [2025] FCAFC 15.
6 section 109N ITAA36.
7 Greensill v Commissioner of Taxation [2021] FCAFC 99.
