Interposed Entity Election — when and why a trust group makes one

An IEE — formally an election under section 272-85 of Schedule 2F to the Income Tax Assessment Act 1936 — "interposes" an entity (a trust, partnership, company or even an individual) into the family group of an existing Family Trust Election. Once interposed, distributions and other transactions between that entity and the FTE-electing trust no longer attract Family Trust Distribution Tax (FTDT), and tax losses or franking credits can flow correctly between them. In plain English: a family trust has elected (FTE) to confine its tax benefits to a specified individual's family group. An IEE adds another entity to that family group so it gets the same protection. Without the IEE, that entity is outside the family group and any distribution to it is a leakage event with severe tax consequences.

An FTE locks a trust to a specified individual (the "primary individual") and their statutorily-defined family — spouse, children, grandchildren, parents, siblings, and any trust where they're a default beneficiary. Once made, the FTE is generally irrevocable and the trust's tax losses, franking credits, small-business CGT concessions and certain other tax attributes can only flow to entities within that family group. The IEE is a satellite election. It's only available to entities that aren't already in the family group automatically (a non-family trust, a non-family company, a partnership where one or more partners are outside the family). The election makes that entity treated as if it were inside the FTE family group for the purposes of trust-loss and franking-credit rules. The price: the entity is subject to the same FTDT rules as the original FTE-electing trust — distributions outside the family group attract penalty tax.

Common scenarios where an IEE comes up: · A trading trust has made an FTE and now wants to use a related corporate trustee or a service company that isn't a default beneficiary of the trust. The corporate entity needs the IEE to participate in the family group. · A discretionary trust receives a franked dividend from a non-family corporate beneficiary, and the franking credit attribution rules require the corporate to be in the family group — IEE is the mechanism. · Tax losses in a non-family company need to be offset against FTE-trust profits — the company must be interposed first. · A second discretionary trust is set up for a specific purpose (e.g. asset protection, business segregation) and needs to share the family group of the original FTE trust without making its own separate FTE that would carve out a different specified individual. Most small-business and family trusts never need an IEE. It's a structuring tool that becomes relevant once a group has multiple entities and is moving losses, dividends or franked distributions between them.

An IEE is lodged by the trustee of the interposed entity (or the public officer of a company, or each partner in a partnership) on the approved ATO form (currently the Interposed Entity Election form, available via the ATO). The election: · Specifies the FTE the interposed entity is joining · Names the specified individual of that FTE · Specifies the income year from which it applies · Is signed by all relevant authorities (trustees, public officer, every partner) · Is irrevocable except in narrowly defined circumstances Timing matters. The election generally has to be lodged with the entity's first income tax return after the year it takes effect, or by a specific due date. Late elections are possible only if the entity meets the family-control test for the year in question and certain other conditions. Get the timing wrong and the protection isn't available for that year.

Family Trust Distribution Tax (FTDT) is the penalty that applies when an FTE-electing trust (or an entity covered by an IEE under that FTE) distributes income or capital to someone outside the family group. The rate is the top marginal rate plus Medicare levy — currently 47% — and it's not creditable. The ATO collects it directly from the trustee, regardless of who actually received the distribution. The practical effect: once an FTE or IEE is in place, every distribution decision needs a check against the family-group definition. A friendly distribution to a long-time business partner, a charity (other than a deductible-gift-recipient charity expressly within the family group) or even a related entity that hasn't itself been interposed will attract FTDT. The cost can wipe out the benefit the FTE was protecting in the first place.

IEEs sit inside a wider net of trust-loss and integrity rules: · Same-business test (s 165) and continuity-of-ownership test (s 166) for company losses still apply — the IEE doesn't override them, it just opens a path the FTE family-group test was blocking · Trust-loss tests (s 267 onwards in Schedule 2F) — the income-injection test, the pattern of distributions test, and the control test all still apply to the interposed entity · Franking-credit attribution rules — the interposed entity inherits the family-group treatment for franking purposes, but the 45-day holding-period rule still applies separately · Small business CGT concessions — the family-group classification can affect connected-entity testing in either direction; modelling matters In practice an IEE is rarely a standalone decision — it's part of a wider restructure or trust-group review.

· Making an FTE first and then realising a related entity isn't covered, distributing to it, and triggering FTDT before lodging the IEE · Lodging the IEE late and missing the available year — the election then doesn't cover the period under review · Believing the IEE somehow makes the entity exempt from other trust-loss tests — it doesn't · Not signing-off all required parties (every partner in a partnership, the public officer of a company) — the election is invalid until properly signed · Distributing to a charity, employee, or business partner outside the named family group on the assumption that small distributions are de minimis — they aren't; FTDT applies regardless of size

If your trust group has more than one entity and any of: tax losses you want to use, franked dividends moving between entities, a corporate beneficiary, or a related service company that isn't already in your family group — get a structural review before the next distribution. We map the FTE/IEE coverage, identify any gaps, and flag any planned transactions that would attract FTDT. The cost of one hour of structuring advice is invariably less than the cost of a single FTDT-triggered distribution.