Running a family trust in Australia comes with some great tax advantages, but they don’t just show up automatically. To access them, a decision-maker may need to lodge a family trust election with the Australian Taxation Office (ATO).
Generally, discretionary trusts give their holders full control over how they distribute income and capital each year. But an election changes this by linking the setup to a defined family group and additional ATO rules. And distributions outside those regulations can lead to extra tax.
In this article, you’ll learn exactly how trust models like these work, when an election makes sense, and what happens if you get it wrong. Let’s get started.
What Is a Family Trust Election (FTE), Exactly?
A family trust election (FTE) is a formal choice a trustee lodges with the Australian Taxation Office (ATO) using a form approved by them.
Once you file it, the election changes the status from a discretionary structure to a non-fixed trust. And that shift causes specific tax implications that the trust controller needs to consider before making distributions.
After a decision-maker makes an FTE, the arrangement must follow rules around eligible beneficiaries and income or capital allocations. It means the owners can no longer distribute assets outside the defined group without facing potential tax consequences.
An FTE also creates ongoing obligations after lodgement. The holder must review distributions each income year and ensure they only provide profit or assets to members of the specified individual’s family group to avoid FTDT issues.
All of these complications make a family trust election one of those decisions that deserves a proper look before signing anything.
Family Trust Rules: What the ATO Actually Requires
Knowing these rules upfront helps trustees avoid compliance failures that can lead to distribution tax.
We’ve already mentioned that a family trust election sets the boundaries for how a trust manages distributions and beneficiaries. The ATO also expects entity holders to follow those requirements throughout the life of the election (not only when they first lodge the form).
Specifically, the following two regulations sit at the centre of every election:
The Family Control Test Explained
The family control test (FCT) checks whether the test individual has genuine authority over the arrangement. And AB Mag has observed that owners often underestimate how broadly the ATO views indirect influence when applying this test.
The same individual must keep this level of authority for each specified income year. If another person outside the approved structure gains control, the trust passes into non-compliance territory quickly. As a result, it may no longer meet the family trust rules.
The FCT also applies to situations where another entity sits between the relevant person and the family trust. In these cases, an interposed entity election may be required for tax purposes.
Since the distributions test and income injection test both feed into this assessment, you should review tax affairs carefully before making any structural changes.
How the Family Group Is Defined
The defined family group includes the test individual, their spouse, and any former spouse recognised under the deed. The eligible member also covers lineal descendants and, in some cases, interposed entities that meet the relevant tests.
However, not all family members automatically fall within the beneficiary group. Trustees need to review the trust deed carefully because the legislation only recognises certain individuals as part of the defined group.
So who gets left out? Well, some relatives may fall outside the recognised recipient group. For example, a chosen individual’s spouse from a previous relationship may qualify as a former spouse, while other relatives may not meet the requirements.
Family Trust Election Implications You Should Know
Many decision-makers underestimate how an FTE changes the way their trust operates after lodgement. And honestly, most owners we’ve spoken to didn’t see the allocation restrictions coming until it was already too late.
The things below change once you make a family trust election:
- Distributions Stay Within the Group: The family entity can only distribute income to those within the family group. For instance, the test individual, their spouse, and recognised family members.
- Family Trust Distribution Tax: Any amount flowing outside the eligible members can result in Family Trust Distribution Tax (FTDT) at the top marginal rate. Because of this, the FTDT liability can remove the tax benefits the election was designed to provide.
- Tax Losses Become Accessible: Making an FTE allows the trust to use carried-forward tax losses and bad-debt deductions. But setups outside this structure may not claim these benefits under the same rules.
- Certain Tax Concessions Open Up: A valid election allows the trust to access tax concessions linked to the income injection test. And getting this right can unlock tax benefits across every fiscal year.
- Test Individual’s Spouse: The owner must correctly record the chosen individual’s spouse in the records each financial year. An incorrect record may prevent the trust from meeting the criteria for available taxation.
When you manage these correctly, the trust can use tax benefits unavailable to standard frameworks, including incentives for carried-forward tax losses. Without that, you may face additional tax issues.
FTE and Capital Gains Tax: What Changes?
Capital Gains Tax (CGT) concessions depend on the trust structure and eligibility requirements. Eligible entities can access the 50% CGT discount, which may reduce a capital gain by half when the asset meets the required conditions.
For that reason, fund holders should review the CGT rules alongside their trust model before relying on these benefits.
The key changes stack up as follows once an FTE is made:
| What Changes | Without FTE | With FTE |
| Capital gains tax concessions | Not accessible | Accessible to the family group |
| Concessional tax treatment | Not available | Available for capital distributions |
| Income or capital distributions | Unrestricted | Restricted to the family group |
| Tax concessions for trust election | Limited | Broader usage unlocked |
But making an FTE isn’t that easy. The holding period rule still applies for tax purposes. It means the trust must hold assets long enough before asset allocations attract concessional tax treatment. So timing is an important consideration here.
Additionally, an income year can affect eligibility. If the trust has made an FTE but misses the holding period rule in a given income year, the eligible members may lose access to those benefits.
Franking Credits and the Family Trust Election FTE
A valid FTE allows beneficiaries to access franking credits through a family trust. Without one, they may lose the ability to claim those credits under the family setup rules.
When a trust receives franked dividends, the election FTE affects whether eligible members can use the attached credits. Here, the holders must also meet the holding period rule to retain the claim.
The Tax Institute and Australian tax professionals frequently highlight franking credits as an area where discretionary trusts can make costly errors. The rule itself is clear, but owners need to follow the requirements carefully.
So what does a valid FTE fix? Recipients who receive franked dividends through the family trust election can offset those credits against their Medicare levy obligations. Plus, using franking credits this way even touches the income injection test.
In some cases, trust distributions can involve other tax considerations, including capital gains tax treatment. That’s why the holders should review these criteria before the end of the financial year.
Fixed Trust vs Family Trust: Which One Fits?
A fixed trust suits beneficiaries with locked-in entitlements, while a family trust election gives trustees the flexibility to distribute income and capital at their discretion.
In that sense, it’s worth stepping back and asking whether a family trust election is even the right framework for your situation. Honestly, not every trust needs an election, and the right call depends on your goals.
Two very different structures suit two very different situations. Here’s how they break down:
When a Fixed Trust Makes More Sense
A fixed trust works well when recipients hold fixed entitlements to income or assets from the start (fixed entitlements sound rigid because, well, they are). There’s no need for a family entity election, and the frameworks also stay simpler.
Notably, fixed trusts can’t access the same tax benefits available to non-fixed trusts. But for private groups with wholly owned entities, a simpler compliance structure keeps costs down and administration manageable. In practice, capital distributions are easier to manage, and succession planning stays cleaner without the added compliance layer.
Family members in these arrangements know exactly what they’ll receive. This certainty helps trustees plan distributions efficiently, avoid disputes, and reduce the risk of accidental breaches of the family trust rules.
How to Ensure Income Flows Correctly
Once the owners make an FTE, the trust deed must clearly reflect the family group. If it doesn’t, the same test individual can’t ensure earnings reach the right people.
Additionally, future income and future distributions must stay within the eligible members. One wrong allocation creates an FTDT liability, and repeated errors over multiple fiscal years can increase the financial impact. In this case, trust tax planning can help holders distribute profit efficiently while staying compliant.
Bottom Line: The relevant person should review trust dividends regularly. If needed, a financial adviser or professional legal adviser can help ensure compliance before each income year ends.
Family Trust Distribution Tax: When It Takes Effect
An allocation to an ineligible beneficiary can create a Family Trust Distribution Tax (FTDT) liability. And you’d be surprised how often an overlooked trust distribution resolution silently creates a tax bill nobody budgeted for.
These are the situations where FTDT liability hits the most:
- Wrong Beneficiary Receives Income: When distributions go outside the family group, FTDT can apply. This counts even if the same test individual approved the allocation. The control test sets clear rules around this requirement.
- Top Rate Applied Instantly: The ATO charges family trust distribution tax at the top marginal rate. So there’s no sliding scale. Just one payment to a family member outside the defined group, and the full tax rate applies to that amount.
- Prior Income Years Caught Too: If the election was not maintained correctly, the ATO can assess prior fiscal years. Unexpected tax costs can also follow quickly when earlier allocations fall under that review.
- Voluntary Disclosure Helps, Sometimes: In limited circumstances, voluntary disclosure to the ATO can reduce penalties. That said, the FTDT liability stays, but the additional charges on top of it may come down.
- Medicare Levy Adds On: On top of the marginal rate, the Medicare levy applies to amounts flowing outside the family group. That pushes the total tax rate even higher than before for each income year.
Getting these requirements wrong after making an FTE can create significant tax issues. To avoid those issues, trustees should keep earning distributions within the eligible members and review each decision carefully during every tax year.
Is a Family Trust Election Right for You?
A family trust election isn’t the right move for every trust. But when it fits, you can witness the real tax benefits. Franking credits, succession planning, and capital gains concessions all become more accessible for the right structure.
That said, choosing a family trust model takes careful consideration. A detailed assessment of your goals, family group, and tax position will point you toward the right call for your circumstances.
If you’re considering a family trust election, seek advice from a qualified financial adviser and review your tax position carefully. For more guides on Australian business and tax frameworks, visit Australian Business Magazine.
Frequently Asked Questions About Family Trust Election
Once decision-makers explore the finer details, a few practical questions often come up:
Can You Revoke a Family Trust Election Once It’s Made?
Revoking a family trust election is possible but only in very limited situations. Once you make an FTE, the election is binding for that income year and all future years. The ATO sets strict conditions for revocation, and most trustees don’t qualify.
What Happens If Distributions Go Outside the Family Group?
Family trust distribution tax applies immediately. The ATO can also assess prior income years if the test individual failed to maintain the control test correctly. That review can be costly.
Does an Interposed Entity Election (IEE) Affect the Control Test?
Yes. An interposed entity election IEE brings certain entities within the eligible members for tax purposes. Without it, those entities sit outside the defined group. That also affects whether the structure can receive franked dividends and access franking credits through its allocations.
Disclaimer: This article is for general information only and does not constitute financial, tax, legal, or accounting advice. Everyone’s circumstances are different, and you should seek advice from a qualified accountant, tax adviser, or other professional before making any decisions. Australian Business Magazine (ABMAG) is not responsible for any actions taken based on the information in this article.
