Family trusts

Family trust for tax purposes

A family trust for tax purposes is one whose trustee has made a voluntary election to be treated as a family trust for tax purposes. This is known as a family trust election (FTE). A trust is not a family trust for tax purposes simply because the words 'family trust' are in the trust's name. The trustee must take the active step of making an FTE for the trust to be treated as a family trust for tax purposes.

There are 5 main reasons why a trustee may choose to make an FTE:

• Trust loss provisions – a non-fixed trust has losses or deductions but may not be able to satisfy the trust loss tests to utilise them. By becoming a family trust, the trust is subject to concessional tax treatment. Only one of the trust loss tests (the income injection test) applies, and only in a modified way.
• A company loss tracing concession – the company loss provisions allow a company that has a non-fixed trust as a shareholder to benefit from a tracing concession where it is a family trust. Broadly, the tracing concession applies so that where the trustee of a family trust holds the relevant interests in a company, a single notional entity that is a person will be taken to own the interests. This means that there's no need to trace past the family trust.
• The holding period rules regulating access to franking credits – the holding period rules require that the taxpayer hold the shares or interest in the shares 'at risk' for a continuous period of at least 45 days (or 90 days for preference shares) to access any franking credits. An FTE will mean the beneficiary's interest in the shares will be considered held 'at risk'. However, the beneficiary will still need to satisfy the holding period rules. The trustee will still also need to be a 'qualified person'.
• Trustee beneficiary reporting (TBR) rules – trusts that have made an FTE or an interposed entity election (IEE) (among others) are excluded from the TBR rules.
• Small business restructure roll-over – small business entities can restructure their business by moving active assets into, or out of, a trust, company, partnership, or a combination, without adverse capital gains tax consequences. Special rules apply in this context to discretionary trusts that have made FTEs.

The FTE entitles the trust to access certain tax concessions. However, family trust distribution tax (FTDT) is imposed at the top marginal rate of tax to distributions made outside the family group. FTDT can have severe consequences, so it is critical that trustees understand the implications an FTE can have on the family trust, the broader private group and future generations before making an FTE.

Family trust elections

A trustee may make a family trust election (FTE) for a specified income year by making the election in writing and in the approved form. The trust must pass the family control test (FCT) at the end of the specified income year. The FTE must also specify an individual as the individual whose family group is taken into account for the election.

When the FTE is in force, the trust is a family trust for tax purposes. It can access the tax concessions available to family trusts. Generally, an FTE is in force from the beginning of the income year specified in the FTE. However, if the FCT is not passed for the whole of the specified income year, the election commences from the time the trust passes the FCT continuously for the rest of the income year.

The income year specified in the FTE must have ended before the FTE is made. An FTE can only be made if the trust passes the FCT at the end of the specified income year. The FTE can specify an earlier income year to commence the election if from the beginning of the specified income year until 30 June of the income year immediately prior to the income year the election is made, both:

• the trust passes the FCT
• any conferrals of present entitlement or actual distributions of income or capital during the period have been made to:
  • the specified individual, or
  • members of their family group.

For example, the trustee of Trust B is making an FTE in the 2026 income year specifying the 2023 income year. The trustee can specify 2023 provided that from the beginning of that income year (that is, from 1 July 2022) until 30 June in the income year before the election is made (that is, 30 June 2025), Trust B satisfies the FCT and has not made any distributions outside the specified individual's family group.

These rules apply to FTEs specifying the 2005 and later income years. FTEs for the 2004 or earlier income years could only generally be made in the relevant return of income or under the transitional rules in the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998.

A trustee can only make one FTE for the trust.

Once the FTE has been made, it can only be varied or revoked in limited circumstances.

For more information about making an FTE, see Family trust election, revocation or variation 2025 (NAT 2787).

The specified individual

The FTE must specify a person as the individual whose family group is taken into account in relation to the election. They are referred to as the specified individual, primary individual or test individual throughout Schedule 2F. The FTE does not confer any additional rights or responsibilities on them.

Only one individual can be specified in the FTE.

The individual must be alive between the election commencement time and making of the election. An FTE cannot be made for a person that is deceased or has not been born.

If the specified individual dies, they remain the specified individual in the FTE. The members of the family group are still determined by reference to that individual.

Trustees should carefully consider the selection of the specified individual. The decision has implications for the broader private group and future generations.

Revoking a family trust election

An FTE can be revoked where the:

• family trust is a fixed trust, or
• FTE wasn't required for recouping tax losses, deducting bad debts or accessing franking credits (subject to satisfying certain conditions).

An FTE is not taken to be revoked if the specified individual dies. The trustee cannot revoke the FTE on the death of the specified individual, unless they meet one of the other criteria for revocation.

Generally, revocations can be made until the end of the fourth income year after the income year specified in the original FTE. Revocations are made in the FTE revocation schedule to the trust’s tax return for the income year from which the revocation is to be effective. The revocation cannot be backdated to an earlier year.

A tax return that has already been lodged can't be amended to include an FTE revocation schedule. Additionally, we cannot defer time for lodging an FTE revocation schedule not lodged with the tax return.

If the trust isn't required to lodge a tax return for the income year, you must give the revocation form to us:

• within 2 months of the end of that income year, or
• such later day as the Commissioner of Taxation allows.

A new FTE can't be made for a trust that has previously revoked an FTE.

Varying a family trust election

The specified individual can be varied once, but only once, subject to certain conditions, including that both:

• the new specified individual was a member of the original specified individual's family at the time the election commenced
• there have been no conferrals of present entitlement or distributions of income or capital:
  • by the trustee of the family trust or an entity that made an interposed entity election to interpose with the family trust election
  • to parties outside the new specified individual’s family group
  • during the period the election has been in force.

Also, the specified individual can be varied if, as a result of a family law order, agreement or award arising from a marriage or relationship breakdown, the control of the trust passes to the new specified individual or the new specified individual and members of their family.

The trustee does not have the ability to vary the:

• FTE on the death of the specified individual (unless they meet another criterion for variation)
• specified income year.

Generally, variations can be made until the end of the fourth income year after the income year specified in the original election. Variations must generally be made in the FTE variation schedule to the trust’s tax return for the income year the variation is to be effective. An FTE variation cannot be backdated to an earlier year.

A tax return that has already been lodged can't be amended to include an FTE variation schedule. Additionally, we cannot defer lodgment of an FTE variation schedule not lodged with the tax return.

If the entity isn't required to lodge a tax return for the income year, the variation form must be given to us:

• within 2 months of the end of the income year, or
• such later day as the Commissioner allows.

Interposed entity elections

An interposed entity election (IEE) is a voluntary election which allows a trust, partnership, or company to join the family group of an individual specified in a family trust election made by a trust. The 2 main reasons to make an IEE are:

• Firstly, to make an entity a member of the family group of the individual specified in an FTE, which means the trustee of the family trust can confer present entitlement to, or distribute, income or capital on or to the entity that made the IEE without the trustee becoming liable for family trust distribution tax.
• Secondly, to exclude a trust from having to comply with the Trustee beneficiary reporting rules.

The IEE may provide certain benefits to interposed entities or a broader private group. However, the trade-off is that FTDT is imposed at the top marginal rate of tax when any distributions (not just those flowing from the family trust) are made by the entity outside the family group. FTDT can have severe consequences, so it is therefore critical that the entity understands the implications an IEE can have on the interposed entity and broader private group before making an IEE.

Making an interposed entity election

In making an IEE, the interposed entity (company, partnership or trust) elects to be included at all times, after a specified day in a specified income year, in the family group of the individual specified in the trust's FTE.

The interposed entity can specify an earlier income year from when the election is to commence. This is if, from the beginning of the specified income year until 30 June of the income year immediately preceding the election, both:

• the entity passes the family control test
• any conferrals of present entitlement or actual distributions of income or capital of the family trust (the entity is interposing with) during the period have been made on or to:
  • the individual specified in the FTE, or
  • members of that individual’s family group.

Generally, the IEE is in force at all times after the ‘election commencement time’. This is usually the beginning of the specified day in the IEE. However, if the FCT is not passed for the whole of the specified income year, it is the earliest time from which the company, partnership or trust passes the FCT continuously for the remainder of the income year.

The death of an individual specified in an FTE of a family trust doesn't prevent any other trust, company, or partnership from making an IEE to be included in their family group.

A company, partnership, or trust may make more than one IEE. This is provided that each family trust for which the entity is making the IEE has the same individual specified in its FTE.

A family trust can make an IEE to be included in the family group of an individual who is different from the person specified in the trust's FTE. However, this will effectively narrow the family group of the family trust to those individuals and entities which are common to both specified individuals' family groups.

Once an IEE has been made, it can only be revoked in very limited circumstances. An IEE cannot be varied.

These rules apply to IEEs specifying the 2005 and later income years.

For more information, see Interposed entity election or revocation 2025 (NAT 2788).

Revoking an interposed entity election

The ability of an interposed entity to revoke an IEE is very limited.

An IEE can be revoked where an interposed entity was at the election commencement time, or becomes at a later time, a member of the family group of the specified individual. For instance, where:

• members of the family have fixed entitlements, directly or indirectly, and for their own benefit, to all of the income and capital of the entity, or
• a family trust has the same specified individual as another family trust to which it makes an IEE.

Additionally, an IEE is taken to be automatically revoked if the FTE to which it relates is revoked.

An IEE is not taken to be revoked if the specified individual dies. The interposed entity does not have the ability to revoke the IEE on the death of the specified individual unless another criterion for revocation is satisfied.

Generally, revocations can be made until the end of the fourth income year after the income year specified in the original election. Revocations must generally be made in the IEE revocation schedule to the entity’s tax return for the income year from which the revocation is to be effective. The revocation cannot be backdated to an earlier year.

A tax return that has already been lodged can't be amended to include an IEE revocation schedule. Additionally, we cannot defer lodgment of an IEE revocation schedule not lodged with the tax return.

If the entity isn't required to lodge a return for the income year, the IEE revocation form must be given to us:

• within 2 months of the end of that income year, or
• such later day as the Commissioner of Taxation allows.

Make, vary, or revoke an FTE or an IEE

An election to be treated as a family trust (FTE) or interposed entity (IEE) for tax purposes must be made in writing and in the approved form.

The variation or revocation of an existing FTE or IEE should generally be made in a schedule to the entity's return of income for the income year it is to be effective. It cannot be backdated to an earlier year.

The approved form is generally one of the forms approved each year by the Commissioner for making, varying or revoking an FTE or IEE. It should include all the information specified in the FTE or IEE form; however, the form will not necessarily be invalid if some labels are incorrect or incomplete.

For more information, see:

• Family trust election, revocation or variation 2025 (NAT 2787).
• Interposed entity election or revocation 2025 (NAT 2788).

Record keeping for trustees

The trustee of a family trust is required to include certain information about the FTE on the trust tax return each year the FTE remains in force. This is the same for companies, partnerships and trusts with IEEs.

The trustee must keep written records of the original FTE until generally 5 years after the trust is no longer required to lodge income tax returns with us. This is the same for companies, partnerships and trusts with IEEs. It is always best practice to keep written records of elections while family trusts and interposed entities are making and receiving distributions.

For more information, see PS LA 2005/2 Penalty for failure to keep or retain records.

Family trust distribution tax

Family trust distribution tax (FTDT) is a special tax that is payable where:

• a trustee of a trust has made a family trust election
• a partnership's partners, a company or the trustee of another trust have made an interposed entity election to be included in the family group of the individual specified in the FTE made by the family trust
• the trustee of the family trust, interposed trust, or interposed partnership or the interposed company:
  • confers a present entitlement to, or distributes, income or capital
  • to an entity other than to the specified individual or members of the specified individual's family group.

Consequences of family trust distribution tax

FTDT is payable at the top marginal rate of tax applying to individuals, plus Medicare levy (currently 47%). The trustee, partners or company are generally liable for FTDT. Joint and several liability is also attached to directors of companies.

FTDT is payable on the amount or value of any distributions or conferrals made by the family trust or interposed entity outside the family group at any time after the election becomes effective (which can include a time before the election is made). It applies to the actual distribution made, which may be different to amounts included in the trust or entity's tax return.

FTDT generally becomes due and payable 21 days after the date on which the distribution occurs. In a case where the conferral or distribution is made before the day the election was made, then FTDT is due and payable at the end of 21 days after the day the election was made. These dates apply regardless of when the distribution is identified as being subject to FTDT.

We are generally required by law to pursue recovery of FTDT. FTDT is a debt owed by a person to the Commonwealth. We have no discretion to disregard or ignore FTDT that we identify as being payable by a person.

Where we identify that FTDT is payable by a person, we may give the person an FTDT notice of liability. We specify the amount of FTDT payable, and the day the tax became or will become due and payable.

We may give the FTDT notice of liability at any time. There is no time limit on issuing an FTDT notice of liability. The liability of the person to FTDT is not dependent on, or in any way affected by, giving the notice. It is not necessary for us to issue a FTDT notice of liability for FTDT to be due and payable.

A person that is dissatisfied with a FTDT notice of liability may object to a decision to issue the notice. You cannot object to the imposition of FTDT directly.

General interest charge

The person is also liable to pay the general interest charge (GIC) on any unpaid amount of FTDT that remains unpaid 60 days after the day it is due to be paid. This applies for each day in the period that began 60 days after the FTDT was due. It finishes on the last day that the FTDT and applicable GIC remains unpaid.

GIC applies from this date regardless of when the distribution is identified as being subject to FTDT or when the FTDT notice of liability is given. This means that the GIC can be significant if FTDT is identified many years after the distribution.

GIC on FTDT is GIC imposed on an unpaid tax liability (that is, late payment GIC). Taxpayers can request remission of GIC on a case-by-case basis under section 8AAG of the Taxation Administration Act 1953 and in accordance with PS LA 2011/12 Remission of General Interest Charge.

Amendments apply to the deductibility for ATO interest charges incurred in income years starting on or after 1 July 2025. This means that GIC incurred on FTDT on or after 1 July 2025 is not deductible. Any GIC incurred on FTDT prior to 1 July 2025 is not impacted by changes in law. It will continue to be deductible for the 2024–25 and earlier income years. The issue date of a FTDT notice of liability does not affect deductibility of GIC.

For more information, see:

• Remission of interest charges.
• Denying deductions for ATO interest charges.

If you identify that FTDT is payable

If you identify that FTDT liabilities are payable on a distribution, you should pay the FTDT as soon as possible to prevent further GIC accruing. Accompany each payment of FTDT with the Family trust distribution tax payment advice (NAT 6175).

Upon payment of the FTDT, the amount or value of the distribution may become non-assessable non-exempt income of the trust, partnership or company, or any other person. The trustee, entity or other person may request an amendment to their assessment at any time to reflect these amounts. For more information, see Amend your tax return.

Key issues to be aware of

We're seeing an increase in FTDT issues due to:

• inadequate record keeping
• succession planning
• intergenerational expansion of businesses, and
• evolving private groups.

Once you have made an FTE or an IEE, it’s important to be mindful of who the specified individual is (for each election). There is a strict legal definition of family and family group, based on who the members of the 'specified individual’s' family group are.

Private groups may have multiple family trusts with different specified individuals. This means there will be differences in who is in the respective 'family groups'. The business may have expanded with new entities or changes in family members (for example, after a divorce).

While the election is in effect, FTDT will apply if any distributions are made outside the family group.

Before you make conferrals or distributions, you should:

• maintain strong governance and record-keeping practices
• understand what elections an entity or group has in place
• identify the members of the specified individual's family group.

Family trusts, interposed entities and their advisors should review this information on at least an annual basis. Keep those elections front of mind when administering your tax affairs. Do not treat elections as 'set and forget'.

We have no discretion to ignore the application of FTDT. We also cannot limit the period to which FTDT applies. We have no power to extend the time to revoke or vary elections.

Refer to Examples showing how FTDT applies.

Terminology for family trusts

Family control test

The family control test (FCT) broadly tests who can control the income or capital of an entity.

Trusts

When making a family trust election (FTE) or an interposed entity election (IEE), a trust passes the FCT at a point in time when some or all of the following people control the trust:

• the individual specified in the relevant FTE
• members of the specified individual's family
• a professional legal or financial adviser to the family.

The FCT looks at, among other things, who can control the application of income or capital of the trust.

For this reason, a professional legal or financial adviser might be part of the controlling group of a family trust. For example, an adviser might be one of the directors of the trustee company. However, a person can only be a controller as a professional legal or financial adviser because of their status as an adviser, rather than in a personal capacity.

Companies and partnerships

A company or partnership passes the FCT when the specified individual, members of their family and family trusts that have made an FTE in favour of the specified individual, beneficially hold between them, directly or indirectly, fixed entitlements to more than 50% of the income or capital of the company or partnership.

Because the FCT for companies and partnerships only looks at who beneficially owns interests in the entity, any control influenced by a professional legal or financial adviser isn't relevant to determining whether the family controls a company or partnership.

The FCT for companies and partnerships is more restrictive than the FCT for trusts. For example, the FCT for companies and partnerships can't be satisfied where a company or partnership is owned by a family trust that has made an FTE in favour of a different individual. That is even if the different individual is a member of the original specified individual's family. It is therefore important to carefully consider whether the company or partnership satisfies the FCT before making an IEE.

Family group

When determining whether a conferral or distribution has been made, the following people and entities are generally members of the family group of the individual specified in the FTE:

• members of the specified individual’s family
• certain former members of the specified individual’s family who are no longer members due to a breakdown in a relationship or death (including former spouses, former widows and widowers and former stepchildren)
• the family trust for which the family trust election has been made
• other family trusts with the same individual specified in their FTE
• trusts, companies or partnerships that have made an IEE with the effect of becoming a member of the specified individual’s family group
• trusts, companies or partnerships (other than non-fixed trusts) where the specified individual, members of the specified individual's family and family trusts that have nominated the specified individual, have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the trust, company or partnership
• deductible gift recipients in Australia
• bodies all of whose income is exempt from income tax.

Non-fixed trusts with a different individual specified in the FTE or IEE will not be part of the specified individual's family group. This will be the case even if the other individual is a family member of the specified individual.

There is only very limited scope for a company or partnership to be a member of the specified individual's family group. A company or partnership that is partly or fully owned by persons or entities that are not the specified individual, members of the specified individual's family and family trusts will not be part of the specified individual's family group, unless the company or partnership has made an IEE that had the effect of becoming a member of the specified individual's family group. There are however strict rules for companies and partnerships to satisfy the family control test to make an IEE, which may mean this is not possible.

If an individual passes away, their deceased estate does not generally become a member of the family group in their place.

Family of the specified individual

The family of the individual specified in the relevant FTE consists of that person (the test individual) and all of the following (if applicable):

1. Any parent, grandparent, brother, or sister of the specified individual or the specified individual's spouse.
2. Any nephew, niece, or child of the specified individual or the specified individual's spouse.
3. Any lineal descendant of a nephew, niece, or child referred to in point 2.
4. The spouse of the specified individual or of anyone who is a member of the specified individual's family because of points 1, 2 and 3.

‘Any lineal descendant’ includes any descendant (of an individual) in a direct line of relationship flowing downwards. This starts with an individual's child (including an adopted child or stepchild) and extends to include a grandchild, a great-grandchild and so on.

The 'family' of an individual does not include aunts, uncles, or cousins.

A person doesn't cease to be a family member merely because of the death of any other family member.

If the specified individual or a member of their family has a spouse when they die, the spouse will remain a member of the specified individual's family until they become the spouse of a person outside of the family group. At that time, they instead become a member of the specified individual’s family group.

If the individual specified in an FTE separates from their spouse, their spouse remains a member of the family. However, if the marriage or relationship ends, the former spouse won't be a member of the 'family'. However, the former spouse will remain a member of the 'family group'.

Distributions

The concept of a distribution is broader in Schedule 2F than in other parts of the tax law.

A distribution includes trust distributions, partnership distributions and company dividends. It can also include a broader range of transactions with beneficiaries, shareholders and partners, including capital distributions, payments, credits, and transfers of property.

A distribution can also include payments (including loans) and credits, transfers or use of property and forgiveness or waiver of debt where the transaction exceeds the consideration given in return. These transactions can be distributions even if the recipient is not a beneficiary, shareholder, or partner of the family trust or interposed entity.

If the transaction is not in the form of money or money equivalent, and instead takes the form of property or some other benefit, it will be necessary to obtain a monetary equivalent of the property or other benefit provided. The valuation should be made by reference to all relevant matters affecting the value of the property or benefit, including, for example, its market price (if any).

If the consideration is given after the time the distribution is made (for example, a loan) it may be necessary to calculate the value of the distribution by reference to the present value of the consideration to be given. The present value of the consideration must be determined at the time the distribution is made. It must take into account any amounts owed or things to be given under contract by the beneficiary to the trust (or third party) in return for the distribution. Additionally, if consideration that was to be given at the time of a distribution is not subsequently given, this will be relevant to the value of the distribution.

A reasonable salary, wage or other benefit (such as superannuation contributions or fringe benefits) provided to, or for the benefit of, an employee for work performed is not considered to be a distribution.

For further guidance on the types of transactions that may be treated as distributions, see Taxation Determination TD 2017/20 Income tax: is a person who is not a beneficiary of the trust capable of having a distribution made to them for the purposes of section 272-60 of Schedule 2F to the Income Tax Assessment Act 1936?

Examples showing how FTDT applies

The following examples highlight some common scenarios for private groups where FTDT can arise or that can increase the risk of it applying. These risks can compound over time as a group’s activities and structure evolve, and as wealth and control are transferred to the next generation.

In this scenario, we refer to Alice and her spouse Bill. Alice and Bill have 3 adult children, Dara, Eddie and Finn.

Alice began a pet store business in a discretionary trust, Trust A, in 2007. The trustee of Trust A made an FTE specifying Alice commencing in the 2007 income year.

 

 

 

 

 

In each of these examples, the respective trustees, companies and directors are jointly and severally liable for each FTDT liability. FTDT generally becomes due and payable 21 days after the date on which the distribution occurs, regardless of when the distribution is identified as having been subject to FTDT. In a case where the conferral or distribution is made before the day on which the election was made, then the FTDT is due and payable at the end of 21 days after the day on which the election was made.

GIC begins to accrue 60 days after the FTDT becomes due and payable. If Alice’s private group did not realise FTDT applied to these transactions until many years later, then the GIC may be significant and in some instances the GIC liability could exceed the FTDT liability.