Your client’s trust has a family trust election. Do you know why it was made? An FTE is a one-time choice that behaves like a permanent contract. Done right, it unlocks concessions. Done casually, it produces family trust distribution tax at 47%.
Is it worth making one?
Only if you can articulate the benefit.
1. Trust losses. Without an FTE, a non-fixed trust must satisfy complex loss rules. A “family trust” only needs to pass the income injection test (Div 270 Sch 2F ITAA 1936). Materially easier.
2. Franking credits. Without an FTE, beneficiaries of a non-fixed trust cannot be a “qualified person” for former Pt IIIAA ITAA 1936. An FTE opens that door.
3. Company losses. A company with a discretionary trust shareholder will struggle to satisfy the COT. A “family trust” is a “single notional entity” for tracing purposes (s 165-207 ITAA 1997). No need to trace past the trust.
4. Small business restructure rollover (Subdiv 328-G ITAA 1997). A “family trust” gets concessional treatment for the “ultimate economic ownership” test.
If the only reason is “we always tick that box”, the election should not be made.
Who do you pick?
The test individual is the anchor. The family group is built around this person (s 272-80(3) Sch 2F).
“Family” is statutory and narrow (s 272-95): spouse, parents, grandparents, siblings, nieces, nephews, children, lineal descendants and their spouses. Cousins, uncles and aunts are generally NOT included.
“Family group” is wider (s 272-90): includes entities, but only via fixed entitlements or an interposed entity election.
The test individual must be alive when the election is made (ATO ID 2014/3). Death does not end the election but limits future flexibility. Variation is narrow (s 272-80(5A)-(5C)).
What can go wrong?
FTDT at 47%. If value leaves the family group (by distribution, loan, use of property, debt forgiveness or undervalue transfer), FTDT applies (s 271-15). “Distribution” is far broader than a trust distribution minute (s 272-60).
Evidence risk. In Widdup [2023] FCA 377, trust returns indicated an FTE for years. The taxpayer denied making one. The Court held it was open to the Commissioner to proceed on that basis. If your return says an FTE exists, that is high-stakes.
IEE traps. Interposed entity elections lock entities into a family group. When ownership changes, dividends can fall outside the boundary. Review IEEs before any transaction.
Revocation is near-impossible. A non-fixed trust can only revoke within four years of the specified year and only if it has not needed the FTE for franking credits, losses or bad debts (s 272-80(6A)-(6B)). Revoke once and you can never make another FTE (ATO ID 2008/73). No ordinary time limit for FTDT review.
An FTE is powerful when used deliberately. It is a landmine when used reflexively. Know why it was made, who you anchored it to and where the boundary sits.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.