Family trusts – concessions

A family trust for tax purposes is one whose trustee has made a valid family trust election (FTE). It is not sufficient to simply include the words ‘family trust’ in your trust’s name.

A trustee only makes a valid FTE where they have satisfied the relevant tests, and made an election in writing in the approved form. Once the election has been made, it cannot be varied or revoked except in limited circumstances.

The FTE entitles the trust to access certain tax concessions. The trade-off is that family trust distribution tax (FTDT) is imposed when distributions are made outside the family group.

There are five main reasons to become a family trust:

  • The trust loss measures – a non-fixed trust has a carried forward tax loss, or certain debt deductions, but the trust could not satisfy the required trust loss tests to recoup the loss. By becoming a family trust, the trust is subject to concessional treatment and 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 that non-fixed trust is a family trust. Broadly, the tracing concession applies so that where the relevant interests in a company are held by the trustee of a family trust, a single notional entity that is a person will be taken to own the interests. This means that there is no need to trace past the family trust.
  • The holding period rules regulating access to franking credits – the holding period rules allow the trustee and beneficiaries of a family trust that receives a franked dividend or franked non-share dividend to benefit from a franking credit concession. Broadly, unless the trustee of a non-fixed trust has elected for it to be a family trust, a beneficiary of the trust who does not have a vested and indefeasible interest in so much of the capital of the trust as is comprised by the shares giving rise to the dividends will not be a ‘qualified person’ for the purposes of the holding period rule. Someone who is not a ‘qualified person’ is denied the benefit of the franking credits attached to dividends paid on shares, or interests in shares, acquired by trusts (other than widely held public share-trading trusts).
  • Trustee beneficiary reporting (TBR) rules – generally, these rules require the trustee of a closely held trust to advise the ATO of certain details. These are details about each trustee beneficiary that is presently entitled to a share of a tax preferred amount of the trust, or has included in its assessable income a share of the net income of the trust comprising an ‘untaxed part’. This advice must be provided by the due date for lodgment of the closely held trust’s tax return. Trusts that have made an FTE or an interposed entity election (IEE) (among others) are excluded from having to comply with the TBR rules.
  • Small business restructure roll-over – from 1 July 2016 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. There are requirements that must be met in order to access the rollover. One of these is that there is no material change in the ultimate economic ownership of an asset. Special rules apply in this context to discretionary trusts that have made FTEs.

While any kind of trust can elect to be a family trust, the need to pass the family control test restricts the choice to a trust that is not widely held and where a specific family effectively controls the trust.

FTDT at the top marginal rate is payable where a distribution is made to a party that is not a member of the family group of the specified individual named in the FTE.

The trustee of a family trust will also be liable to pay trustee beneficiary non-disclosure tax if it makes a circular trust distribution.

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Family trust elections

A trust is a family trust at any time when a family trust election (FTE) for the trust is in force. Generally, an FTE is in force from the beginning of the income year specified in the FTE (the election commencement time). The FTE must also specify an individual who forms the point of reference for defining the family group that is taken into account in relation to the election.

The income year specified in the FTE must have ended before the FTE is made. This is because an FTE can only be made if the trust passes the family control test at the end of the specified income year. The FTE can specify an earlier income year from when the election is to commence, provided that from the beginning of the specified income year until 30 June of the income year immediately preceding that in which the election is made:

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

Generally, an FTE is in force at all times after the ‘election commencement time’.

The election commencement time is usually the beginning of the income year specified in the FTE. However, if the family control test (FCT) is not passed for the whole of the specified income year, the election commencement time is the time from which the trust passes the FCT continuously for the rest of the income year.

These rules apply to FTEs specifying the 2004–05 and later income years.

The ability to make a FTE specifying an earlier year of income can impact on an FTDT liability that would otherwise arise but for that election.

See FTDT examples: FTE reversing FTDT liability.