How do lenders treat trust distributions?

Evidence commonly required

Expect the lender to review the trust tax return and financial statements, your personal tax return and notice of assessment, the distribution statement and sometimes the trust deed. They will also check liabilities and other beneficiaries.

• A consistent history is generally easier to use.
• Discretionary distributions can receive closer scrutiny.
• Controlled trusts may allow a broader profit assessment.
• Income cannot be counted twice through both profit and distributions.

Tax income is not always lending income

A beneficiary may be taxed on an entitlement without receiving matching cash at that time. Lenders therefore look beyond the tax return to decide whether the income is genuinely available and sustainable for repayments.

Beneficiary income and controlled-trust income

A beneficiary who does not control the trust is commonly assessed on distributions actually received and supported over a suitable history. Where the borrower controls the trust, some lenders can assess a share of the underlying trust profit instead. Control can depend on the trustee, appointor, directors and trust deed, not just the name shown on a distribution statement. The lender also considers whether other beneficiaries have an entitlement to the same profit.

Why consistency matters

A regular distribution over two financial years is generally easier to treat as ongoing than a large one-off amount. If the latest figure increased, the lender may average it, use the lower year or request current trading evidence. If a distribution fell, the application should explain why and whether the lower result is likely to continue. The goal is to identify income that is sustainable, not simply the highest amount appearing in a tax return.

What to prepare

Prepare the trust tax returns and financial statements, personal returns and notices of assessment, distribution statements and the current trust deed. Where a corporate trustee is used, company records may also be required. Reconcile any beneficiary loan accounts and explain unpaid present entitlements or distributions that were retained in the structure. Tax and lending treatment are different, so obtain tax advice before changing distributions purely to improve a loan application.

Questions to ask before you proceed

• Which financial years and income method will this lender use for my structure?
• How will add-backs, retained profit, tax debt and business facilities be treated?
• Which current documents will support changes since the last completed financial year?

Official guidance: ATO: Trust income in individual tax returns

This is general information, not personal financial, tax or legal advice. Lending criteria, fees and eligibility vary.

Related questions

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