Family trust elections: what Perth business owners should understand before making one
If your accountant has suggested making a Family Trust Election, or FTE, it is worth understanding exactly what is changing before the election is made.
An FTE is not simply another name for having a “family trust”. For Australian tax purposes, a trust becomes a family trust under Schedule 2F of the Income Tax Assessment Act 1936 while a valid family trust election is in force. The election identifies one individual whose family group becomes the reference point for the relevant tax rules.
There can be valuable taxation reasons for making an FTE. For example, the ATO identifies concessional treatment under the trust loss rules and aspects of the holding-period rules for franking credits among the reasons an election may be useful.
The trade-off is that the election introduces boundaries around who the trust and, potentially, related entities can benefit without Family Trust Distribution Tax becoming an issue.
For Perth business owners using discretionary trusts as part of a business, investment or family wealth structure, that makes an FTE a decision to consider in the context of the whole structure, rather than treating it as a year-end tax-return formality.
What does a Family Trust Election actually do?
A trustee making an FTE nominates a single specified individual, also commonly called the test individual. That person becomes the reference point for determining the trust's “family group” under the tax legislation.
The election itself does not give the specified individual ownership of the trust or additional rights over it. The ATO expressly notes that only one individual can be specified and that the election does not confer additional rights or responsibilities on that person.
The important consequence is taxation: distributions and other benefits need to be considered by reference to that defined family group.
This is why the beneficiary provisions in a trust deed and the FTE rules should not be treated as the same thing. A person or entity being capable of benefiting under the trust's governing documents does not automatically establish that a distribution to them falls within the tax-defined family group.
Why might your accountant recommend an FTE?
An FTE is voluntary. There is no general requirement for every discretionary trust to make one.
The question is whether the particular trust needs the concessions or treatment that an election can provide.
Using trust losses
One important reason concerns carried-forward trust losses.
The ATO explains that a non-fixed trust with losses or certain deductions may have difficulty satisfying the ordinary trust-loss tests. When it qualifies as a family trust, concessional treatment can apply, with the income injection test continuing to operate in a modified form.
That does not mean making an FTE automatically makes every past loss deductible. The trust's facts, the relevant income years and the applicable conditions still need to be reviewed.
Franked dividends and franking credits
An FTE can also be relevant where a discretionary trust receives franked dividends.
The ATO identifies the holding-period rules governing access to franking credits as another reason trustees may make an FTE. A valid election can affect whether beneficiaries satisfy the relevant requirements for franking-credit purposes.
For business owners whose investment or company structures regularly generate franked income, that can make the election commercially significant rather than merely administrative.
The major risk: Family Trust Distribution Tax
The benefit of an FTE comes with an important restriction.
Where a family trust distributes income or capital outside the specified individual's family group, Family Trust Distribution Tax (FTDT) can apply. The current ATO rate is 47% for 2017–18 and later income years.
Current legislation expressly provides for FTDT where a trust with an FTE confers an entitlement to, or distributes income or capital to, someone outside the specified individual's family group. Similar provisions apply to entities with an Interposed Entity Election.
For a business owner, the practical lesson is straightforward: do not assume that a recipient is safe simply because they are related to the family or appear somewhere within a broader group structure.
Before annual trust distribution resolutions are prepared, the relevant recipients should be checked against the FTE and any related elections.
Choosing the specified individual deserves careful thought
The specified individual can have a lasting influence on the tax boundaries around the trust.
Current law says a trustee cannot make more than one FTE for a trust. Although there are statutory provisions allowing the specified individual to be changed in particular circumstances, the requirements are restrictive.
The ATO also confirms that if the specified individual later dies, they remain the specified individual and the family group continues to be determined by reference to them.
That makes the choice relevant to more than this year's tax return.
For a family business, it is sensible to consider how the proposed individual fits with:
the current ownership and control structure;
anticipated beneficiaries of the trust;
companies and other trusts within the family group;
future generations and changes in family circumstances;
succession plans;
investment structures; and
possible future business restructures or asset sales.
The objective is not to predict every event decades in advance. It is to avoid choosing a specified individual solely because they happen to be convenient for the tax issue arising today.
An FTE is not necessarily impossible to change — but flexibility is limited
This is an area where precision matters.
Under the current legislation, an FTE generally cannot be varied or revoked, subject to defined exceptions. The legislation includes conditions governing changes to the specified individual and limited circumstances in which an election can be revoked. Some of those provisions also contain specific time limits.
The ATO consequently recommends considering both the current and future impact before making an election and reviewing FTEs and Interposed Entity Elections as part of ongoing trust administration.
So the better mindset is not “we can never change this” or “we can fix it later”.
It is: make the election on the assumption that it may continue to matter for a very long time.
What about companies and other trusts in the family structure?
Many Perth business families do not operate through a single discretionary trust.
There may also be a trading company, investment company, corporate beneficiary, property trust or another family trust.
In appropriate circumstances, a company, partnership or trust can make an Interposed Entity Election (IEE) so it is included in the relevant family group. Schedule 2F contains the rules governing these elections.
An IEE should not be viewed only as a mechanism for getting another entity “inside” the group. Once an election is in place, distributions made by that entity outside the relevant family group can themselves create FTDT exposure.
For multi-entity family businesses, an FTE review therefore needs to map the flow of income and capital across the whole structure.
Be especially careful when choosing an earlier income year
An FTE can, in certain circumstances, specify an income year earlier than the year in which the election is actually made.
That can be useful, but conditions apply.
Current legislation requires, among other things, the relevant family-control requirements to have been satisfied and prior distributions during the relevant period to have remained within the specified individual's family group.
The ATO gives the example of an election made in the 2026 income year specifying 2023: the trust must satisfy the relevant conditions from the beginning of the 2023 income year through to 30 June 2025.
That makes historical trust distribution records particularly important before an earlier year is selected.
Questions to answer before making an FTE
Before the trustee proceeds, the accounting and taxation review should establish:
Why is the FTE being considered? Identify the particular taxation outcome or concession that makes the election relevant.
Which income year should be specified? Do not select an earlier year without reviewing the historical conditions.
Who should be the specified individual? Map the resulting family group before deciding.
Who has received trust distributions previously? This is particularly important where an earlier commencement year is proposed.
Which related companies, partnerships or trusts are involved? Establish whether any existing IEEs are in force or whether another entity needs separate consideration.
Who may receive income or capital in future? Consider the current structure alongside succession, investment and business plans.
How will the election be monitored? Keep the FTE and related elections visible when annual trust distributions and structural changes are considered.
This type of review turns the election from a compliance exercise into an informed tax-planning decision.
Common FTE mistakes to avoid
Problems often arise not because an FTE is inherently unsuitable, but because it is made or administered without enough attention to the surrounding structure.
Common risk areas include selecting the specified individual without mapping the family group, assuming a corporate beneficiary is automatically within the group, making an election for an earlier year without checking previous distributions, overlooking existing IEEs and forgetting about the election when the structure changes years later.
Another mistake is assuming that because an election was appropriate when made, no further review is needed. The ATO specifically encourages trustees and advisers to keep FTEs and IEEs in mind as part of annual administration.
Where Symmetry can assist
For Perth business owners, a useful FTE review starts with the numbers and the structure.
Symmetry Accounting & Tax Pty Ltd can assist with the accounting and taxation implications of an FTE, including reviewing why the election is being considered, examining historical distributions, assessing the relevant tax concessions, identifying related entities that need to be considered and incorporating the election into ongoing trust tax compliance.
Where the trust forms part of a broader business or succession arrangement, our business advisory work can also help ensure the financial and taxation consequences are considered alongside your wider plans. Symmetry's current services include taxation planning, business structuring and analysis, financial management and broader SME advisory services.
If separate trust, estate or succession documents require review, the accounting and tax process can be coordinated with the professionals responsible for those documents.
Frequently asked questions
Is a Family Trust Election compulsory?
No. An FTE is voluntary. Whether it is worthwhile depends on the trust's circumstances and whether the tax treatment available to a family trust is relevant.
Is a Family Trust Election permanent?
It is more accurate to say that an FTE is generally continuing and difficult to change. Current legislation permits variation or revocation only in particular circumstances and, for some provisions, within specified time periods.
Can the specified individual be changed later?
Only where the statutory requirements for variation are satisfied. It should not be assumed that the specified individual can simply be replaced whenever family circumstances change.
What happens if the specified individual dies?
The ATO says the deceased person remains the specified individual and the family group continues to be determined by reference to that individual.
Does everyone named as a beneficiary in the trust automatically fall within the FTE family group?
No. The beneficiary provisions of the trust and the tax definition of the FTE family group are separate considerations. The relevant recipient must be assessed under the Schedule 2F rules.
What is an Interposed Entity Election?
An IEE is an election through which a qualifying company, partnership or trust can be included in the family group associated with an FTE. It also brings ongoing FTDT considerations for distributions made by that entity.
Should every family business trust make an FTE?
No. The decision should be driven by the trust's taxation position, structure and expected distributions rather than by the fact that the trust is commonly described as a “family trust”.
Think beyond this year's tax return
A Family Trust Election can be very useful where the relevant tax concessions are needed. But the decision also changes the framework within which future trust distributions are considered.
Before making the election, understand why it is needed, which individual will define the family group, which entities sit within the structure and who may need to benefit from the trust in future.
For Perth business owners with discretionary trusts, companies or multi-entity family structures, Symmetry Accounting & Tax Pty Ltd can help review the accounting and taxation implications and ensure the election is considered as part of the broader financial picture.
General information only. This article does not take account of your individual objectives, taxation position or trust arrangements and is not personal taxation, accounting or financial advice. Individual circumstances differ. Obtain professional advice appropriate to your circumstances before acting.
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