Discretionary trusts are one of the most common structuring vehicles for Australian family businesses and professional practices. For bookkeepers, the end-of-year trust distribution process is both time-critical and technically demanding — the resolution must be made before 30 June, the journal entries must reflect the legal position, and any failure to pay distributions promptly to company beneficiaries can create Division 7A exposure. This guide covers the mechanics.
The Distribution Resolution Deadline
A trustee of a discretionary trust must make a valid distribution resolution before midnight on 30 June of the income year to which it applies. If no resolution is made, the trust's net income is distributed in accordance with the trust deed's default provisions — which often vest in a specific beneficiary (sometimes the trustee itself) at the highest marginal rate.
The ATO's Taxation Ruling TR 2012/D1 and subsequent guidance have made clear that:
- Resolutions must be made and documented before the end of the income year — a backdated resolution made after 30 June is not effective
- The resolution must clearly identify the beneficiaries and the amounts or proportions of net income to be distributed
- For trusts that stream capital gains or franked dividends separately (see below), the streaming resolution must be made with sufficient specificity
As a bookkeeper, your responsibility is to ensure the trust accounts are sufficiently finalised before 30 June so the trustee can make an informed, defensible resolution. Waiting until July to complete year-end journals and then backdating the resolution is a significant compliance risk.
Journal Entries for Trust Distributions
Once the resolution is made, the bookkeeping entries are straightforward but must reflect the legal reality. Assume a trust with net income of $180,000 to be distributed as $90,000 to Individual A and $90,000 to Company B:
At the time of resolution (by 30 June):
DR Trust Distribution Expense — Individual A $90,000
DR Trust Distribution Expense — Company B $90,000
CR Trust Distribution Payable — Individual A $90,000
CR Trust Distribution Payable — Company B $90,000
The trust distribution payable accounts are current liabilities on the trust's balance sheet. They remain there until the cash is actually transferred to the beneficiaries.
When cash is paid to beneficiaries:
DR Trust Distribution Payable — Individual A $90,000
CR Bank $90,000
If distributions remain unpaid at the next 30 June, the Division 7A implications for company beneficiaries must be assessed.
Division 7A and Unpaid Present Entitlements
This is the most commonly mishandled aspect of trust distribution bookkeeping. When a trust distributes income to a company beneficiary and the cash is not paid within the same income year, the resulting unpaid present entitlement (UPE) is potentially caught by Division 7A of ITAA 1936.
From 1 July 2022, the ATO finalised its long-standing guidance: a UPE owed by a trust to a private company is treated as a financial arrangement under s.109T of ITAA 1936. The unpaid amount must either:
- Be placed on a complying loan agreement (7-year unsecured at the benchmark interest rate, or 25-year secured — see Division 7A rates), and minimum yearly repayments made; or
- Be paid in full by the earlier of: the due date for lodgement of the trust's income tax return, or the actual lodgement date.
If neither step is taken, the UPE becomes a deemed unfranked dividend to the interposed entity (typically the company's shareholders), included in their assessable income.
The sub-trust option (placing the UPE on a complying loan between the trust and the company as lender) is a common approach, but the documentation requirements are strict — the loan agreement must be in writing and executed before the trust's return due date.
As a bookkeeper, flag any UPE to a company beneficiary immediately after year-end. The window to comply is narrow.
Streaming Capital Gains and Franked Dividends
Australian trust law permits trustees to stream specific classes of income to specific beneficiaries, provided the trust deed permits streaming and the ATO's requirements under Division 6E of ITAA 1997 are met. Two types are commonly streamed:
Capital gains — A trustee can stream a capital gain to a beneficiary who can utilise the 50% CGT discount (an individual or complying superannuation fund that has held the underlying asset for more than 12 months). If streamed correctly, the beneficiary receives the discount and the gain does not inflate other beneficiaries' assessable income.
Franked dividends — A trustee can stream franked dividends and the attached franking credits to beneficiaries who can utilise them (typically taxpayers with high marginal rates who benefit most from the franking credit offset).
The streaming resolution must identify which beneficiary is to receive which streamed amount. Bookkeeping must reflect the streaming by allocating the relevant income to the correct beneficiary in the working papers, not simply pooling all income and distributing at a flat rate.
Record-Keeping Obligations
Trusts are required to keep records under s.262A of the Income Tax Assessment Act 1936 for five years after the relevant return is lodged. Specific records that support a trust distribution include:
- Minutes of trustee resolution made before 30 June
- Trust deed and any deed of variation (to confirm streaming powers and default distribution clauses)
- Year-end accounts showing the trust's distributable income
- Records of any amounts paid out (bank statements, EFT receipts)
- Division 7A loan agreements (if applicable) and repayment schedules
Where ReconLink is used to reconcile the trust's bank account, the audit trail for cash transfers to beneficiaries is automatically captured — reducing the risk of missing or inconsistently dated payment records.
Common Pitfalls
- Late resolutions: Resolutions made after 30 June are ineffective and can result in the trust's income vesting in the default beneficiary at the highest tax rate.
- Incorrect net income calculation: Trust distributions must be calculated on the trust's net income for tax purposes, not just accounting profit — tax adjustments (depreciation, prepayments) must be factored in before the resolution.
- Ignoring UPEs to companies: Failing to put a UPE on a complying Division 7A loan can result in deemed dividends, penalties, and interest for both the trust and the company's shareholders.
- Mixing trust accounts with operating accounts: Trust distributions payable must be reflected in the trust's accounts, not the operating entity's accounts, where separate entities exist.
Legislation and Further Reading
- Income Tax Assessment Act 1936, Division 7A — loans and payments treated as dividends
- Income Tax Assessment Act 1997, Division 6E — streaming of trust capital gains and franked distributions
- Income Tax Assessment Act 1936, s.262A — record-keeping obligations
- ATO Tax Ruling TR 2012/D1 — distribution of trust income
- ATO: Trust income and distributions (www.ato.gov.au/individuals-and-families/investments-and-assets/trusts)
- ATO: Division 7A — unpaid present entitlements (www.ato.gov.au/Business/Private-company-benefits---Division-7A-dividends/)