Family Trust Elections: Why it's time for a review

Family Trust Elections (FTEs) and Interposed Entity Elections (IEEs) have existed for decades, but they're increasingly becoming a focus for business owners, advisers, and the Australian Taxation Office (ATO).

For many family groups, these elections were established years ago and then largely forgotten. However, with the ATO taking a closer look at trust structures and historical distributions, now is the time to revisit them.

An FTE allows a trust to access certain tax concessions, including trust losses, company losses, and the flow-through of franking credits. In exchange, distributions are generally restricted to members of a defined family group linked to a nominated "test individual."

While that sounds straightforward, the rules can be surprisingly complex. One of the most common misconceptions is that all family-owned entities automatically form part of the same family group. The legislation is highly technical, and some entities that appear to be connected to a family group may not qualify under the rules.

Why are FTEs gaining attention now? 

The legislation isn't new, but the ATO's scrutiny is.

As part of broader reviews of private groups, high-wealth individuals, and trust structures, the ATO is paying greater attention to trust distributions and whether Family Trust Elections have been established and managed correctly.

One of the key concerns is that the Family Trust Distribution Tax (FTDT) does not operate like many other tax provisions. If a distribution is made outside the permitted family group, the tax consequences can be significant, and the ATO may review distributions made many years ago.

This means elections that were once treated as a compliance exercise are now being revisited with a much greater focus on risk management. Trustees should ensure election documentation is retained; the nominated test individual remains appropriate, and historical distributions have been made in accordance with the family group's rules. 

Common mistakes can create unexpected consequences

One of the challenges with FTEs is that family ownership doesn't always align with the technical definition of a family group under the legislation.

Over time, businesses have evolved. New entities are created, ownership structures change, and distributions are made based on assumptions about who is connected to whom. In some cases, those assumptions can result in entities falling outside the permitted family group.

Choosing the wrong test individual can also have long-term implications, as the test individual determines the scope of who can be included in the family group.

These issues often remain unnoticed until a review is undertaken, making proactive checks particularly important. 

Where do Interposed Entity Elections fit in? 

Interposed Entity Elections are often used alongside Family Trust Elections to bring additional entities into a family group where they would not otherwise qualify automatically.

Companies, trusts, and partnerships can all potentially be included through an IEE, allowing them to participate within the family group structure under the relevant rules.

It is recommended that once a Family Trust Election is in place and a test individual has been nominated, trustees also map out their family group. This exercise can help identify areas of risk and determine whether additional elections may be required. 

Planning for the future matters 

One of the most important considerations is that these elections are generally difficult to unwind once made. Decisions that may seem appropriate today can influence future succession plans, restructures, or business sale opportunities.

For that reason, it's essential to consider not only the immediate tax benefits, but also the broader strategic direction of the group. The right election structure should support both current objectives and long-term plans. 

What should trustees do now? 

For business owners and trustees who haven't reviewed their trust elections recently, a proactive review may be worthwhile.

A good starting point is to:

• Confirm whether an FTE is in place.
• Locate and retain signed election documentation.
• Review the nominated test individual.
• Map out the family group and related entities.
• Check historical trust distributions.
• Consider whether any IEEs are required.

While the rules can be complex, identifying issues early may provide opportunities to rectify them before they become larger problems.

Listen to the full episode 

Family Trust Elections and Interposed Entity Elections can have significant implications for family groups, particularly as the ATO increases its focus on trust structures and historical distributions.

🎧 Listen to the full episode of The PKF Podcast to learn more about Family Trust Elections, Interposed Entity Elections, and the planning considerations that could impact your family group's future.