If you operate a discretionary or family trust, changes to how the ATO collects and cross-checks trust distribution information are worth knowing about, even though they won't change how much tax you pay. What they will change is how closely your trust's distributions are matched against your beneficiaries' individual tax returns, and how visible unpaid distributions become to the ATO.

What's changing

The ATO is progressively rolling out changes to trust distribution reporting under its Modernising Tax Administration Systems program. Two changes apply from Tax Time 2026:

New reporting labels

The Trust Tax Return's Statement of Distribution will include three new labels covering non-primary production managed investment scheme amounts, franked distributions related to investments, and other assessable foreign source income from financial investments.

Pre-filling for individual beneficiaries

Once a trust's tax return is lodged, distribution details will start pre-filling directly into the individual beneficiary's tax return, covering things like their share of trust net income, franked distributions, and associated credits. In practical terms, the information your trust reports and the information your beneficiaries report will need to match, because the ATO will be looking at both side by side.

Further changes have already been flagged by the ATO for the 2027 income year and beyond, though these haven't yet been finalised in the actual return forms. They're expected to include additional reporting of Unpaid Present Entitlements (UPEs) owed to beneficiaries, and an expansion of pre-filling to non-individual beneficiaries such as companies and other trusts.

Why this matters: UPEs are coming into focus

A UPE arises when a beneficiary is made entitled to a share of trust income, but the trust hasn't actually paid it to them, the amount sits owing on the trust's books instead. This is common practice, but it's also an area the ATO has been increasingly focused on, particularly where a UPE might trigger:

Section 100A of the tax law, which can apply where a distribution involves a "reimbursement agreement", broadly, where someone other than the presently entitled beneficiary ends up benefiting from the distribution as part of an arrangement with a tax-reduction purpose. Where section 100A applies, the beneficiary is treated as never having been entitled to the income, and the trustee can be taxed on it at the top marginal rate.

Division 7A, where a private company beneficiary has an unpaid entitlement that isn't managed correctly, which can result in the amount being treated as an unfranked dividend to another party.

The planned UPE reporting change signals that the ATO intends to use this data specifically to identify trusts carrying large unpaid entitlements, particularly to individual beneficiaries, for closer review.

What are the options for managing a UPE?

Broadly, trustees and beneficiaries have a few ways to deal with an outstanding UPE:

• Pay it out. The simplest option, the trust physically pays the beneficiary what they're owed, extinguishing the liability.Disclaim the entitlement. A beneficiary can reject their entitlement to a distribution, but this only works for tax purposes if it happens within a reasonable time, generally before the end of the income year the entitlement relates to. Courts have confirmed that a disclaimer made after year-end doesn't change what the beneficiary is taxed on for that year.
• Forgive the UPE. Usually done through a formal deed of forgiveness or release. This can have its own tax consequences for the beneficiary, since a UPE is itself a CGT asset; forgiving it can trigger a capital gains tax event.

Both disclaiming and forgiving a UPE are treated by the ATOas risk factors it looks for when considering whether section 100A might apply. That doesn't mean either option is off the table, a genuine, one-off decisionto disclaim or forgive an entitlement is generally lower risk than an ongoing pattern, but it does mean the timing and documentation of any such decisionmatters.

What this means for you

None of these changes alter the tax treatment of trust distributions, but they significantly increase the ATO's visibility into how trust income is distributed and whether it's actually paid. If your trust has been carrying unpaid entitlements for some time, particularly to individual beneficiaries, now is a good time to review:

• Whether those UPEs are properly documented and consistent with how the trust's distribution resolutions describe them
• Whether it makes sense to have any outstanding UPEs paid out before they attract closer ATO attention
• Whether your trust's distribution and reporting processes will keep pace with pre-filling as it rolls out

This article is general information only and does not constitute tax advice. Every trust structure and beneficiary arrangement is different, and the treatment of Unpaid Present Entitlements depends on your specific circumstances. Contact Causbrooks to discuss how these changes affect your trust and its beneficiaries.

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