Trust Distributions and Divorce Tax in Australia Explained

QFLP helps Australians align family law and taxation when a family trust makes a distribution during a relationship breakdown. In family law, a trust distribution can affect the part of the property pool to be divided, while in tax law the ATO can assess income and capital gains tax based on the terms of the trust deed and who is presently entitled. We coordinate legal and tax advice so settlements and tax returns match. For tailored guidance, contact QFLP for a confidential consultation.

How Courts and the ATO View Trust Distributions During a Divorce

Trust distributions can influence both the property settlement and the tax payable; treatment depends on control of the trust, entitlement, and timing.

Under the Family Law Act 1975 the Court identifies assets, liabilities, and financial resources, then makes just and equitable orders. Distributions from a discretionary trust may be seen as income to a party, as evidence of benefit, or as part of assets to be divided. For tax, the trustee and beneficiaries account for income and capital gain by reference to the trust deed and resolutions. Example: one party receives a trust distribution after separation; the Court may treat the cash received as part of the pool of assets, while the recipient bears the tax in their tax return unless the deed or a specific rule allocates it differently.

Key Definitions

• Family trust: a trust structure usually run by a trustee for a family group.
• Distribution: allocation of income or capital gain to beneficiaries.
• Present entitlement: when a beneficiary has a right to income or capital under the deed.

Decision criterion: Who controls the trustee and who is presently entitled to receive distributions under the terms of the trust deed?

Family Trust Distribution Tax and Family Trust Elections

Family trust distribution tax (“FTDT”) can apply when a distribution is made outside the defined family group; a Family Trust Election (“FTE”) sets who is in that group for tax purposes.

An FTE nominates a test individual so the ATO can apply family trust rules to protect tax losses and track distributions. If a distribution is made to someone outside the family group, FTDT may be payable at a top rate. During financial settlement planning, parties should confirm which beneficiaries of the trust are within the family group, especially if new entities or changes in family members occurred in 2024. Example: a distribution to a former spouse’s new company may trigger FTDT if that company is not within the nominated group.

FTDT and FTE Checklist

• Confirm whether an FTE exists and who the test individual is.
• Map beneficiaries of the trust and interposed entities.
• Check if any distribution has been made outside the family group.
• Note ATO discretions that may, in limited cases, ignore the application of FTDT or extend the time to make, revoke, or vary elections.

Decision criterion: Is every receiving entity within the family group defined by the election or related interposed entity elections?

CGT and the Rollover on Relationship Breakdown

CGT rollover may defer tax when ownership of an asset changes from one party to another because of a marriage or relationship breakdown.

Where real property, shares, or other assets of the trust are transferred to one party under a court order, a binding financial agreement, or an arbitral award, a rollover of CGT may be available so the capital gain is deferred until a later disposal. The trustee, the company, or the individual should match the rollover conditions to the orders. Example: the trustee transfers listed shares from the trust’s assets to one party under consent orders; the rollover can shift the cost base to the recipient and defer immediate capital gains tax.

CGT Rollover Snapshot

• Orders or agreements linked to the relationship breakdown.
• Asset is transferred directly from a company or trust to one party.
• Rollover defers the capital gain to the recipient’s future sale.

Decision criterion: Does the instrument effecting the transfer qualify for relationship breakdown rollover for the specific asset?

Classifying Trust Distributions for the Property Pool

A distribution can be property, a financial resource, or evidence of capacity to pay; the classification shapes the equitable division of assets.

Distributions received around separation may be treated as part of the property pool in family law if they are retained or traceable. Ongoing distributions may be treated as income that informs spousal maintenance. Where a party has influence over the trust, the Court may weigh the pattern of distributions even from a discretionary trust.

Classification Guide

Decision criterion: Is the distribution a retained asset, an ongoing income stream, or a one-off event tied to a sale?

Timing, Tax Returns, and Who Pays the Tax

Tax follows entitlement and trustee resolutions; the property settlement should specify who lodges, who pays, and how adjustments work.

For income and capital, the person or entity made presently entitled usually returns the amount to the ATO. If a distribution is recharacterised after year end, the trustee may face tax issues. To avoid mismatch, orders can require disclosure of trust funds, accountant sign-off, and tax equalisation clauses.

Practical Settings

• Name who will declare trust income and any capital gain.
• Include tax equalisation or reimbursement mechanisms.
• Require copies of resolutions and the trust’s tax affairs each year.

Decision criterion: Do the orders and the deed produce the same tax outcome the parties priced into the settlement?

Orders and Mechanisms That Work with Trusts

Orders can align control of the trust, future distributions, and CGT outcomes so settlements are enforceable and tax aware.

Mechanisms include directing the trustee to make or refrain from particular distributions, splitting a capital gain in cash, transferring assets with rollover where available, or using staggered payments tied to trust income. Binding financial agreements can complement or predate orders.

Mechanisms to Consider

• Control changes at the trustee and appointor level.
• Fixed distribution percentages for a period to one of the parties.
• Asset transfer clauses referencing the intended rollover of CGT.

Decision criterion: Do the mechanisms deliver cash or assets without breaching the deed or causing unintended FTDT or CGT?

When This Approach May Not Be the Right Fit

If the trust is remote, distributions are uncertain, or elections are in doubt, complex trust tax may outweigh the benefit.

Where no one has practical control, the trust may be considered only as a resource. If the family trust election is unclear and multiple family trusts with different specified individuals exist, compliance risk rises.

Watch-Outs

• Unclear elections or new entities or changes since separation.
• High FTDT risk from distributions made outside the family group.
• Discretionary history with no predictable income.

Decision criterion: Do the compliance costs and tax risks exceed the value gained by sharing the trust?

How to Judge If You Need Action Now or Later

Act early where timing affects elections, FTDT exposure, CGT rollover, and the next distribution cycle.

Before 30 June, trustee resolutions set present entitlement and who declares income. If ownership of an asset changes, rollover analysis should be done before signing. The ATO may, in limited cases, extend the time to revoke or vary certain elections or to accept late elections, but do not rely on discretion.

Prioritise Now If

• End-of-year resolutions or capital transactions are imminent.
• Elections are missing, outdated, or need variation.
• A property transfer under orders is about to settle.

Decision criterion: Will in-year actions lock in tax outcomes that the settlement did not price?

Where This Connects to Your Broader Family Law Strategy

Trust distributions sit alongside salary, business profits, and super in the division of assets and support.

Align trust treatment with business valuation, spousal maintenance, and debt allocation so the financial settlement remains practical.

Connected Topics

• Binding financial agreements and consent orders.
• Business and trust valuations and disclosure.
• International assets and cross-border tax timing.

Decision criterion: Do your orders integrate property, income, and tax so the outcome is fair and enforceable?

Frequently Asked Questions

Need your settlement and tax outcomes to line up? Book a confidential consultation with QFLP. Prefer a checklist first? Request our trust distribution and election review checklist.