Family Trust Election — locking a trust to a family group

An FTE — formally an election under section 272-80 of Schedule 2F to the Income Tax Assessment Act 1936 — designates a discretionary trust as a "family trust" and locks it to a single specified individual and that person's family group. Once made, the trust passes the family-control test for trust loss purposes; tax losses can be carried forward and used; franked dividends can be received with franking credits intact; and certain small-business CGT concessions become available. The price of those benefits is a permanent fence around who can receive distributions. From the income year the election takes effect, every distribution of trust income or capital outside the family group attracts Family Trust Distribution Tax (FTDT) at the top marginal rate plus Medicare levy — currently 47%, payable by the trustee, not creditable, not negotiable.

The election names a single "specified individual" — often the patriarch or matriarch of the family group, but technically anyone the trust deed permits to be a default beneficiary. Once specified, the family group is determined by statute (s 272-90 of Schedule 2F) and includes: · The specified individual themselves · Their spouse (including de facto) · Each parent, grandparent, brother, sister, nephew, niece, child, grandchild and great-grandchild of the specified individual or their spouse · The spouse of any of the above · A trust where the specified individual or any family-group member is a default beneficiary · A company, partnership or trust controlled by any of the above (control = ability to influence trustee decisions or appoint trustees) Deductible-gift-recipient charities can receive distributions even where they're outside the family group, but only if the trust's deed expressly contemplates them as beneficiaries. Friends, employees, business associates, charities not on the DGR register, and related-but-not-controlled entities are all outside the family group — and distributions to them attract FTDT.

An FTE has a real cost (the FTDT fence) so it's not a default move for every trust. The decision is usually driven by one of these triggers: · The trust has accumulated tax losses — without an FTE, those losses can be lost when the family-control test is breached. The FTE locks family control in. · The trust receives franked dividends and the family group needs the franking credits attached — the holding-period rule and the 45-day rule still apply, but without an FTE the franking credits can't be passed through to the distributees in the first place. · A corporate beneficiary or a related service company is used to receive distributions — once an FTE is in place, an IEE can bring those entities into the family group cleanly. · Small-business CGT concessions are being claimed and the connected-entity tests need the family-group classification to satisfy the active-asset / 80% turnover thresholds. · Restructuring or succession planning is being put in place — an FTE locks in a specified individual whose family group is the long-term beneficiary. If none of those triggers apply, an FTE is unnecessary friction. Many discretionary trusts run for years without one and only make one when a specific catalyst arises (a CGT event, a loss carry-forward, an IEE, an estate-planning step).

An FTE is made by the trustee on the approved ATO form (the Family Trust Election, Revocation or Variation form). It: · Designates the trust as a family trust · Names the specified individual · Specifies the income year from which it takes effect (commonly a year in which the family-control test was satisfied) · Is signed by the trustee (or trustees, or the public officer if the trustee is a company) · Is generally irrevocable — limited revocation circumstances exist (e.g. specified individual dies and a new election is made within the prescribed period) but assume it's permanent The election is normally lodged with the trust's first income tax return after the year it takes effect, or by a specific deadline. Late elections are restricted: they can only be made if the trust passed the family-control test for every year from the chosen start year through to the lodgement date. Get the timing wrong and the protection isn't available for the period you needed.

FTDT is the consequence of distributing outside the family group once an FTE is in place. The rate is the top marginal rate (currently 45%) plus Medicare (2%) — 47% in total, on the gross distribution. The trustee pays it directly to the ATO, regardless of who actually received the funds. It's not creditable against the recipient's personal tax. It's not negotiable. The ATO assesses it through the trust-loss provisions in Division 271 of Schedule 2F. In practice, FTDT shows up most often in three scenarios: · A trustee distributes to an employee or contractor outside the family group as a thank-you bonus · A trustee distributes to a non-DGR charity (e.g. a sporting club, a community organisation that isn't endorsed) · A trustee distributes to a related entity (a subsidiary, a service company) that wasn't itself the subject of an IEE — the IEE has to be in place before the distribution flows, not retrospectively The size of the distribution doesn't matter. A $1,000 distribution outside the family group is $470 of FTDT. A $100,000 distribution is $47,000.

An FTE makes the family-control test in s 272-87 the only trust-loss integrity test the trust needs to satisfy. Without an FTE, a discretionary trust has to pass the more onerous control test, the same-business test, and the income-injection test — all of which can disqualify trust losses if circumstances change. With an FTE in place, those tests fall away, replaced by a single question: did the family group continue to control the trust during the loss period? In a normal family group with stable trustees and no external acquisitions, the answer is always yes — and that's the point. The FTE is the certainty mechanism for trust losses. IEE companions sit alongside an FTE. An interposed entity election adds another entity (corporate, trust, partnership) into the family group for the purposes of those same trust-loss and franking-credit rules. See /learn/interposed-entity-election for the IEE mechanics.

· Making an FTE "just in case" without modelling the FTDT exposure — every distribution decision is now constrained · Naming a specified individual whose family group doesn't match the actual distribution pattern — distributions to friends, business partners or non-family entities then trigger FTDT · Assuming a charitable distribution is FTDT-exempt — only DGR charities expressly contemplated as beneficiaries are; non-DGR community organisations attract FTDT · Lodging the election late and missing the year it was meant to cover — the protection then isn't available for that year · Believing the FTE can be revoked if the family circumstances change — it's generally permanent (death of specified individual is the main exception) · Distributing to a corporate beneficiary that hasn't been the subject of an IEE — the corporate beneficiary needs the IEE to receive the distribution without FTDT · Treating an FTE as a small administrative tick-box — it's one of the most consequential trust elections in the Australian system

An FTE shouldn't be made on a whim. Before lodging, the right conversation is: what's the FTE protecting (losses, franking credits, CGT concessions, IEE coverage)? Who are the actual distributees in the next 5-10 years? Are any of them outside the family group as defined? Is there a corporate beneficiary or service company in the structure that needs an IEE? Bring your trust deed, the last three years of distribution minutes, and any related-entity diagrams — we map the FTE/IEE coverage and the FTDT exposure before you lodge.