ATO checklist for complying with trust obligations

By Daniel Butler, Shaun Backhaus on 09/06/2025 in ATO, Corporate trustees, Trustee education

As the end of financial year (EOFY) approaches, trustees and their advisers need to be aware of their trust obligations to ensure ongoing compliance and ensure they do not invoke unnecessary tax liabilities and avoid breaches of trust duties that could result in severe penalties.

The ATO has released a checklist designed to assist with this process – the checklist can be found here.

ATO Checklist

The checklist provides the following recommendations to help avoid basic trust errors:

Understand how income is defined for the trust estate.
Identify the trust’s beneficiaries.
Understand resolutions and present entitlement.
Identify any family trust elections (FTE) or interposed entity elections (IEE).
Maintain clear and accurate records.

The checklist demonstrates that correctly managing trust obligations requires a sound understanding of the deed and various trust law principles that can apply.

Defining income for the trust estate

The ATO highlight the importance of trustees being familiar with the trust deed, understanding how income is defined and ensuring the income of the trust estate is accurately determined for each financial year.

The Draft TR 2012/D1 explains there is no set meaning of the phrase ‘income of the trust estate’, referred to in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) and related provisions. The meaning will primarily depend on the terms of the trust and the statutory context of Division 6, where ‘income’ must be:

measured in respect of distinct income years;
a product of the trust estate; and
an amount in respect of which a beneficiary can be presently entitled.

An understanding of how the deed defines ‘income’ is crucial. For example, a net capital gain is included as net income for tax purposes, but if the deed does not define ‘income’ to include, among other things, capital receipts and capital gains, differences between tax and trust outcomes may arise.

Identifying the trust’s beneficiaries

The ATO states that the beneficiaries of the trust must be correctly identified to avoid distribution mistakes. The identification of beneficiaries involves making a number of considerations, including:

Ensuring due consideration is being given to the needs of each eligible beneficiary.
Making sure that beneficiaries are notified of their entitlements to ensure there are no reimbursement agreement risks under s 100A of the ITAA 1936. For more, refer to our article Family trusts –– managing unpaid present entitlements.
Making sure there are no foreign persons benefiting where foreign person exclusion provisions apply for duty and land tax purposes under the legislation of the relevant state or territory. For more, refer to our article Your discretionary trust may unwittingly be subject to extra duty or land tax.

Careful review of the trust deed is required to ensure distributions to beneficiaries are done correctly in the lead up to EOFY.

Ensuring resolutions are valid

The ATO warns if resolutions to appoint or distribute income to beneficiaries are not validly made by EOFY, trustees risk being liable for all income of the trust being taxed at marginal tax rates.

The ATO may accept trustee resolutions prepared after 30 June that confirm a prior resolution that is not reflected in a formal document. Such resolutions should be drafted as confirmatory and dated when completed.

Typically distribution resolutions need to be made before midnight on 30 June or prior to any earlier date/time specified in the deed. Depending on the terms of the trust deed, there is no specific requirement for a distribution resolution to be recorded by way of a trustee resolution. In the absence of a formal resolution made prior to 30 June, evidence of the making of a decision or resolution by that date is required, such as a handwritten notes, or family group ‘map’ showing relevant distributions amounts or percentages recorded reflective of what was resolved.

Family trust elections and interposed entity elections

The identification of FTEs and IEEs is crucial in avoiding adverse tax implications. The ATO explain that whilst family trusts can access tax concessions, any distributions made outside the ‘family group’ may trigger family trust distribution (FTDT) tax at 47% on distributions.

FTDT can be side avoided by checking that beneficiaries fall within the ‘family group’ where an FTE has been made, having regard to the test individual in that election (or the test individual in any relevant IEE where the trust proposes to distribute to another partnership, company or trust).

There are a range of special rules that apply to FTEs and IEEs and managing these elections in and some family groups can prove challenging. This appears to be a focus of the ATO’s next 5,000 taxpayer private group reviews comprising individuals, who together with their associates and connected entities, control net wealth of more than $50 million.

Clear and accurate records

The ATO urges trustees to maintain complete and accurate records to avoid unforeseen tax liabilities.

Proper record keeping is imperative to managing trust obligations.

Conclusions

The ATO checklist provides some guidance for trustees and their advisers as to what the ATO expects regarding compliance with trust obligations.

In preparation for EOFY, trustees should carefully review their trust deeds and ensure adherence with current trust laws align to avoid breaches, penalties, or adverse tax consequences. Ongoing management of trusts is also required given the increased complexity of managing these issues.

A prudent trustee should seek legal advice where there is any doubt about its trust deed, distribution process or resolutions, particularly where an unusual or significant distribution is involved. Also, many trust deeds that we review are considerably out of date and may not include clear or express streaming provisions.

DBA lawyers would be pleased to assist with revieing and amending trust deeds.

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