Navigating the rules of a discretionary trust can feel complex, but the family trust election (FTE) is a critical compliance decision. It’s a formal declaration to the ATO, nominating a specific ‘primary individual’ and locking your trust into a defined family group for tax purposes. Once elected, the trust can access certain tax benefits such as trust loss rules and franking credit concessions but distributions outside the family group may trigger penalty tax.

Key Takeaways on Family Trust Election

• What is a family trust election? It’s a formal choice lodged with the ATO that defines a trust’s ‘family group’ for tax purposes, centred around one ‘primary individual’.
• Why make one? It’s often necessary to carry forward trust tax losses or to pass on the full value of franking credits from dividends to beneficiaries.
• What’s the catch? Distributions of income or capital outside the defined family group trigger a penalty tax called Family Trust Distribution Tax (FTDT) at the highest marginal rate.
• Who is the primary individual? This is the person whose family relationships (spouse, children, parents, siblings etc.) define the trust’s beneficiaries for tax purposes. The choice is critical and generally permanent.
• How do you lodge it? The election is made on a specific ATO form and is usually included with the trust’s tax return for the year it takes effect.
• Is it mandatory? No, it’s a voluntary election. You only make an FTE when the tax benefits outweigh the loss of flexibility in distributions.

What Is a Family Trust Election?

A family trust election is a formal, voluntary choice a trustee makes under Australian tax law. It officially notifies the ATO that the trust will operate under a specific set of rules, restricting its distributions to a defined ‘family group’ built around a single nominated person, known as the primary individual. This election is crucial for accessing certain tax concessions that are otherwise unavailable to a standard discretionary trust.

Why the Family Trust Election Exists

The FTE rules ATO enforces were introduced to prevent trusts from being used to ‘trade’ tax losses or stream franking credits to unrelated beneficiaries who could best use them. At its core, an FTE is a trade-off: in exchange for greater tax benefits, the trust accepts significant restrictions on who can benefit from its income and capital. The core purpose is to ensure these tax concessions remain within a genuine family structure.

Key ATO Requirements

To make a valid family trust election, several conditions must be met:

1. The trust must pass the ‘family control test’ at the end of the income year for which the election is made.
2. The election must be in writing, on the approved ATO form.
3. A single primary individual must be nominated, and they must be alive at the time the election is made.
4. The election must specify the income year from which it is to take effect.

Once made, an FTE is generally irrevocable. This makes the initial decision a critical part of your overall trust and tax planning strategy.

Primary Individual & Family Group Explained

The choice of the primary individual in a family trust election is the most important decision in the process. This person acts as the anchor for the entire ‘family group’.

The family group definition ATO uses is very specific. It includes:

• The primary individual and their spouse.
• Any parent, grandparent, brother, or sister of the primary individual or their spouse.
• Any nephew, niece, or child of the primary individual or their spouse.
• The spouse of anyone listed above.

Any companies, partnerships, or other trusts can also be included in the family group, provided they make an interposed entity election (IEE). Anyone outside this definition is considered a non-family member for tax purposes.

FTE vs No FTE – Tax Impacts and Restrictions

Deciding to make a family trust election has permanent consequences. It unlocks valuable tax opportunities but imposes rigid distribution rules. Understanding this trade-off is essential for any trustee.

The primary advantages using trust losses and FTE rules to your benefit and accessing franking credits family trust rules are compelling for trusts with business operations or investment portfolios. However, these benefits come at the cost of flexibility, as distributions are strictly confined to the family group.

To lay it out clearly, the table below compares the key tax implications for a trust with and without a family trust election.

Feature	Trust WITH Family Trust Election	Trust WITHOUT Family Trust Election
Trust Losses	Can carry forward and offset past tax losses against future income (subject to modified income injection test).	Generally cannot carry forward tax losses to offset future income. Losses are effectively trapped and lost.
Franking Credits	Can receive and pass on the full value of franking credits to beneficiaries (satisfies holding period rule).	May be unable to pass on franking credits unless the small shareholder exemption (under $5,000) applies.
Distribution Flexibility	Restricted. Distributions can only be made to members of the defined ‘family group’.	High. Distributions can be made to any beneficiary named or defined in the trust deed.
Penalty Tax Risk	High. Distributions outside the family group trigger Family Trust Distribution Tax (FTDT) at the top marginal rate.	Low. No FTDT risk. However, tax may apply at the highest marginal rate if income is undistributed by 30 June.
Compliance	More complex. Requires nomination of a primary individual and potentially Interposed Entity Elections (IEEs).	Simpler. Standard trust tax return compliance applies without FTE-specific rules.

Note: Check current ATO guidance for the latest rules, tests, and tax rates.

As you can see, the FTE offers clear tax advantages but at the cost of flexibility and added complexity. It’s a strategic choice that requires careful thought about your trust’s long-term goals and beneficiary structure. For more on the initial setup, our guide on registering a family trust in Australia is a useful resource.

How to Make a Family Trust Election

The process of making a family trust election is formal and must be done correctly to be valid. Here’s a practical, step-by-step guide for trustees and their advisors.

Step 1: Determine if an FTE is Necessary An FTE is usually triggered by a specific event. Ask yourself:

• Has the trust incurred a tax loss that you want to carry forward?
• Has the trust received franked dividends and you need to pass the franking credits to beneficiaries? If the answer to both is “no,” you may not need to make an election yet. The decision can often be deferred until it’s required.

Step 2: Choose the Primary Individual This is the most critical decision. The primary individual anchors the family group. Consider:

• Longevity: Choosing a younger individual can extend the life of the family group.
• Family Structure: Ensure the chosen individual’s family group covers all intended beneficiaries of the trust.
• Stability: The choice is practically permanent, so select someone central to the family’s long-term structure.

Step 3: Identify Interposed Entities Will the trust distribute funds to any other companies, trusts, or partnerships? If so, each of these entities must make an interposed entity election (IEE) to be included in the family group and avoid FTDT.

Step 4: Complete the Official ATO Form You must use the ATO’s official Family trust election, revocation or variation form.

• Clearly state the primary individual’s full name, address, and TFN.
• Specify the income year from which the FTE is to take effect. This is crucial, it must be correct.

Step 5: Lodge the Election with the ATO The completed FTE form should be lodged with the trust’s tax return for the year the election takes effect. While the election can be made at a later date, it must specify the year it starts from. It’s best practice to lodge it with the relevant trust tax return ATO form.

Step 6: Keep Permanent Records Retain a signed copy of the FTE form (and any IEE forms) with the trust’s permanent records, including the trust deed. The ATO can request proof of the election years down the line.

Worked Example: Trust With and Without an FTE

Let’s illustrate the impact with a scenario.

Trust Structure: The Jones Family Trust has two adult beneficiaries, Sarah and Tom, who are children of the primary individual. In the 2024 financial year, the trust has:

• A carried-forward tax loss of $20,000.
• Taxable income of $100,000.
• A fully franked dividend of $7,000 (with $3,000 in franking credits).
• The trustee wants to distribute $50,000 to Sarah’s company, Sarah Pty Ltd, which is not a beneficiary in the deed.

Scenario 1: With a Family Trust Election The trust has an FTE in place, and Sarah Pty Ltd has made an IEE.

• Use of Losses: The $20,000 tax loss can be used, reducing taxable income to $80,000.
• Franking Credits: The $3,000 in franking credits can be passed on to beneficiaries.
• Distribution to Company: The $50,000 distribution to Sarah Pty Ltd is permissible without penalty because of the IEE.

Scenario 2: Without a Family Trust Election

• Use of Losses: The $20,000 tax loss is trapped and cannot be used. Taxable income remains $100,000.
• Franking Credits: The trust may fail the holding period rule, meaning the $3,000 franking credits could be lost.
• Distribution to Company: The $50,000 distribution to Sarah Pty Ltd would not be possible as it’s not a named beneficiary. If it were somehow made, it could have other adverse tax consequences.

FTDT Calculation Example: Imagine in Scenario 1, the trustee mistakenly distributed $10,000 to a close family friend (outside the family group).

• Distribution: $10,000
• FTDT Rate: 47% (check current ATO guidance)
• Tax Payable by Trustee: $10,000 x 0.47 = $4,700 This $4,700 tax liability is payable by the trustee personally, demonstrating the high cost of a compliance error. For more, you can discover more insights on the election process here.

What Is Family Trust Distribution Tax (FTDT)?

The Family Trust Distribution Tax (FTDT) is a penalty tax designed to enforce the distribution restrictions of a family trust election. It is levied on the trustee when a distribution of income or capital is made to an entity or person outside the defined family group.

This is not a minor penalty. The FTDT is imposed at the highest marginal tax rate plus the Medicare Levy (currently 47% – check current ATO guidance). It applies automatically, and the ATO has very limited discretion to waive it, even for genuine mistakes. The trustee is personally liable for this tax. You can learn more about the ATO’s position on FTDT to understand its strict application.

Interposed Entity Elections (IEE) – When You Need One

An interposed entity election (IEE) is essential if your family trust plans to distribute funds to another company, partnership, or trust. Without an IEE, that entity is considered an outsider, and any distribution to it will trigger FTDT.

By making an IEE, the entity is formally brought into the family group for distribution purposes. The IEE form must be lodged with the tax return for the year the entity first receives a distribution. Forgetting to lodge an IEE is a common and costly compliance failure. For more details on trust compliance, see our guide on the trust tax return.

Checklist: Before You Lodge an FTE

Making a family trust election is a significant tax decision. Rushing the process or overlooking details can lead to compliance breaches and penalty tax. Use this checklist as a final review before lodging the paperwork with the ATO.

• Confirm Trust Deed Allows It: Review the trust deed to ensure there are no clauses preventing an FTE. Some older deeds may contain restrictions.
• Verify the Primary Individual: Double-check that the chosen primary individual is alive at the time of election and is the most strategic choice for the trust’s long-term objectives.
• Map the Family Group: Clearly identify every person and entity that falls within the family group according to the strict family group definition ATO provides. Don’t assume, document it.
• Identify All Interposed Entities: List every company, partnership, or other trust that has received or may receive a distribution. Each one requires a separate Interposed Entity Election (IEE).
• Assess FTDT Exposure: Ensure the trustee fully understands the risks and consequences of distributing outside the family group. This is a critical governance step.
• Complete the Correct ATO Form: Use the current version of the Family trust election, revocation or variation form. Fill it out completely and accurately.
• Specify the Correct Income Year: Ensure the form clearly states the first income year for which the FTE is to take effect.
• Plan for Record-Keeping: Have a system in place to store a copy of the signed FTE and any IEEs with the trust’s permanent records.

Common Mistakes & Quick Fixes

Even with careful planning, errors can occur. Here are some common traps and how to address them.

• Mistake: Making a distribution to a family company but forgetting to lodge an Interposed Entity Election (IEE).
  • Fix: Lodge the IEE form with the company’s tax return for the income year the distribution occurred. The ATO generally accepts a late-lodged IEE if it aligns with the relevant tax return.
• Mistake: The primary individual was incorrectly specified or has passed away before the election was made.
  • Fix: An election with a deceased primary individual is invalid. You must choose a new primary individual who is alive when the election is made. If an error was made on the form, contact the ATO immediately to see if an amendment is possible.
• Mistake: A distribution is made to a person who is ‘family’ in spirit but not by ATO definition (e.g., a cousin of the primary individual’s spouse).
  • Fix: Unfortunately, there is no fix. FTDT is triggered automatically. The trustee must report and pay the tax. This highlights the importance of mapping the family group correctly from the outset.

FAQs:

What is a family trust election? 

A family trust election (FTE) is a formal choice made to the ATO that nominates a ‘primary individual’ and locks the trust into a defined family group for tax purposes. This allows the trust to access certain tax benefits like using trust losses.

When do you need to make a family trust election? 

You typically need to make an FTE when the trust has tax losses it wants to carry forward or has received franked dividends and wants to ensure beneficiaries can claim the full franking credits.

How do you choose the primary individual? 

The primary individual is the person whose relatives define the trust’s ‘family group’. The choice is strategic and should be based on the family structure and long-term goals of the trust, as the election is generally permanent.

What happens if you don’t make a family trust election? 

Without an FTE, the trust has more flexibility to distribute to any beneficiary in the deed but generally cannot carry forward tax losses or pass on franking credits, potentially leading to a higher tax burden.

What is an interposed entity election? 

An interposed entity election (IEE) is a separate election made by a company, partnership, or another trust that receives distributions from the family trust. The IEE brings that entity into the family group, preventing FTDT.

How does a family trust election affect distributions? 

An FTE strictly limits distributions to members of the defined family group. Any distribution of income or capital outside this group triggers Family Trust Distribution Tax (FTDT) at the highest marginal rate.

Does an FTE affect franking credits? 

Yes. Making an FTE helps the trust satisfy the holding period rules, allowing it to pass on the full value of franking credits to beneficiaries. Without an FTE, these credits may be lost.

Can you revoke a family trust election? 

Revoking an FTE is extremely difficult and only allowed by the ATO in very limited circumstances, such as the death of the primary individual. For all practical purposes, the decision should be considered permanent.

Conclusion

Making a family trust election is a significant, compliance-heavy decision with lasting financial consequences. While it unlocks crucial tax advantages for managing trust losses and franking credits, it imposes rigid restrictions that, if breached, can lead to severe penalties. The key is to balance the tax benefits against the loss of distribution flexibility.

Navigating the FTE rules, choosing the right primary individual, and managing ongoing compliance requires specialist knowledge. Don’t leave it to chance.

Ensure your trust is structured correctly and fully compliant with ATO requirements. Book a consult with Nanak Accountants & Associates today by calling 1300 NANAK TAX (626 258).

This article provides general information only for Australia. It doesn’t consider your objectives, financial situation or needs. Rules, thresholds and fees change – check current ATO/ASIC/ABR guidance and seek professional advice before acting.