Does Your Trust Deed Allow for Effective Income Streaming?

When it comes to managing tax outcomes for beneficiaries of a discretionary trust, income streaming can be a powerful tool. By allocating different categories of income—such as franked dividends or capital gains—to specific beneficiaries, trustees can optimise tax efficiency. However, not all trust deeds provide the necessary powers to make this possible.

Why Income Characterisation Matters

A trust deed that includes income characterisation powers allows trustees to decide what counts as “distributable income.” This is critical because taxable income doesn’t always align with cash receipts or accounting principles. For example, non-assessable amounts, like the capital gain from the 50% CGT discount, may or may not be included in distributable income depending on the deed’s wording.

Without express provisions, income will generally be determined under trust law principles, which may restrict flexibility and tax effectiveness.

The Role of Streaming Provisions

Streaming provisions let trustees allocate specific categories of income to different beneficiaries. This is particularly important where beneficiaries have differing tax profiles. For example:

• Corporate beneficiaries cannot access the 50% CGT discount.
• Individual beneficiaries may benefit more from capital gains or franking credits.
• Non-residents may face different tax outcomes.

Without clear streaming powers, the ATO expects trust income to be distributed proportionately rather than streamed. This can significantly reduce the intended tax benefits.

Do You Need to Review Your Trust Deed?

Substantial legislative changes in 2011–12 reshaped how trusts can implement streaming. If your trust deed was drafted before 2012 and has not been updated, it should be carefully reviewed. Even more recent deeds vary in quality—meaning not all contain adequate provisions.

If streaming has been attempted under a deed without proper authority, trustees may face compounded tax liabilities, interest, and penalties. Updating the deed—and seeking expert advice on whether past tax returns require adjustment—may be necessary.

Key Takeaway

Before preparing trust distribution resolutions, trustees and advisers should ensure their deed provides both income characterisation and streaming powers. Trust law and tax strategies evolve, and deeds that are not kept current may limit flexibility, increase tax exposure, and prevent trustees from optimising outcomes for beneficiaries.

Reviewing and updating trust deeds is not just about compliance—it’s about securing tax efficiency and ensuring your trust operates as intended in today’s regulatory environment.