Distribution of Taxable Income in Trust

Q&A Tax

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If a trust accounting income differs from its taxable income, what would be the best approach in
distributing the income as per the ATO.

For example, Accounting income is $15K and the minute has been set out as follows

  • Mum – $10000
  • Dad – Rest of the balance

If the taxable income was $30,000 due to tax adjustments, how is that taxable income distributed.

Would it be proportioned 50/50 (i.e. 15K to Mum & 15K to Dad) or would $10,000 go to the Mum and
the balance of $20,000 be distributed to the Dad?


Answer :

A trustee cannot distribute taxable income to beneficiaries. The trustee can only appoint or distribute
distributable income, which is generally determined according to the terms of the trust deed and trust law principles.

With every trust client, you need to check the trust deed to see how the distributable income is
determined or calculated as this can vary significantly from the trust to trust.

The way the trust assessment rules work in section 97 ITAA 1936 is that you need to apply what’s
referred to as the proportionate approach (e.g., refer to the High Court decision in the Bamford case
which discussed this). This operates as follows:

First, you need to determine which beneficiaries were made presently entitled to some of the
distributable income of the trust during the year.

You then need to determine the percentage of total distributable income that each beneficiary was
presently entitled to.

Once you have determined this percentage, you apply it to the taxable income of the trust to
determine how much is assessed in the hands of each beneficiary.

For example, if the distributable income of the trust is $20,000 and the trustee has resolved to
distribute the first $10,000 to mum with the balance to dad it would appear that mum and dad are both
presently entitled to $10,000, representing 50% of total distributable income. This means that they
should each be assessed on 50% of the taxable income of the trust for the year

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