Distributable Net Income (DNI) Explained: 2025 Guide for Australian Investors

When it comes to distributing profits from trusts in Australia, Distributable Net Income (DNI) is the financial concept that sits at the heart of tax compliance and planning. For 2025, with the Australian Taxation Office (ATO) doubling down on transparency and tightening rules, understanding DNI has never been more critical for trustees and beneficiaries alike.

What Is Distributable Net Income (DNI)?

Distributable Net Income (DNI) refers to the amount of income a trust can legally distribute to its beneficiaries in a given financial year. It’s not just a line on a tax form – it’s a calculation that determines who pays tax, at what rate, and how much cash actually lands in the hands of beneficiaries.

Unlike accounting profit, DNI is shaped by trust law, the trust deed, and Australian tax legislation. This means the calculation can diverge significantly from a trust’s net accounting income, especially after factoring in tax adjustments, capital gains, franking credits, and expenses disallowed for tax purposes.

• DNI is the basis for allocating taxable income to beneficiaries.

• If DNI is not distributed according to trust rules, the trustee may face penalty tax rates.

• Recent ATO rulings (including TR 2022/4 and PCG 2022/2) have impacted how DNI is assessed for family and discretionary trusts.

Key 2025 Policy Updates Impacting DNI

In 2025, the ATO has introduced further clarification on the treatment of DNI for trusts, particularly in relation to Section 100A of the Income Tax Assessment Act. The focus is on preventing tax avoidance through so-called ‘reimbursement agreements’ and ensuring that trust distributions reflect genuine entitlements.

• Section 100A scrutiny: The ATO has increased its review of trust distributions to adult children and family members, especially where the cash does not actually flow to the beneficiary.

• Streaming of capital gains and franking credits: The rules for streaming these components remain strict – trusts must have clear resolutions and comply with deed terms for beneficiaries to receive the tax benefits.

• Timing of trustee resolutions: The ATO requires resolutions specifying DNI allocations to be made by 30 June each year, with failure leading to the trustee being assessed at the highest marginal tax rate.

For example, a family trust with $200,000 in DNI in FY2025 must carefully document how much is distributed to each beneficiary. If $50,000 is distributed to an adult child, but the funds are redirected to a parent, the ATO may deem this a reimbursement arrangement, triggering Section 100A and potentially hefty penalties.

Calculating and Distributing DNI: Practical Considerations

Calculating DNI isn’t just a matter of subtracting expenses from income. Trustees need to consider:

• Non-assessable income (like some capital receipts)

• Deductible and non-deductible expenses

• Tax adjustments for prior year losses

• Income streaming provisions (for capital gains, franking credits)

• Any specific directions in the trust deed

Real-World Example: Suppose a trust earns $120,000 in business income, $20,000 in franked dividends, and makes a $10,000 capital gain. The trust deed allows for streaming. After allowable deductions, DNI is $135,000. The trustee resolves to distribute:

• $80,000 to Beneficiary A (including all franked dividends)

• $45,000 to Beneficiary B (including the capital gain)

• $10,000 remains undistributed and is taxed at the highest marginal rate

Each beneficiary must include their share of DNI in their tax return, with credits for any franking credits or capital gains tax discounts as applicable. If the trust fails to distribute DNI in line with the deed or tax law, the trustee risks the ATO stepping in and taxing the undistributed income at 45%.

Why Understanding DNI Matters More in 2025

With the ATO’s renewed focus on trust distributions, DNI is no longer a back-office calculation. It’s a front-line issue for tax planning and risk management. Trustees need to:

• Review their trust deeds and ensure they’re up to date with streaming provisions and Section 100A guidance

• Make timely and compliant resolutions for DNI allocations before 30 June each year

• Keep clear documentation to defend against potential ATO review

For investors and beneficiaries, DNI affects not just how much you receive, but how much you’ll ultimately keep after tax. Getting it wrong can mean missed tax benefits or surprise tax bills.

Conclusion

Distributable Net Income is the linchpin of trust taxation in Australia, especially as we move through 2025’s regulatory landscape. Trustees, beneficiaries, and their advisers need to ensure DNI is correctly calculated and distributed, with a keen eye on ATO policy shifts and compliance deadlines. Taking DNI seriously means more certainty, less risk, and potentially more money in your pocket.