A family trust election is an optional declaration made to the Tax Office, notifying the Tax Office of the desire to be treated as a “family trust” for taxation purposes.
Being a “family trust” has specific consequences.
Family trust status provides a simplification of some of the tax rules which apply to trusts and their associated entities. The family trust may be less flexible as a result, and is potentially exposed to the Family Trust Distribution (“FTD”) Tax.
The top marginal tax rate on distributions
The top marginal tax rate plus medicare is applied to distributions outside a designated family group which attract the FTD (Family Trust Distribution) Tax.
The FTD tax rate is equivalent to the top marginal tax rate plus medicare, currently 2%.
The current (from 1 July 2017) family trust distribution tax rate is 47%.
Measures first announced in the Federal Budget 2014-15 presented to parliament on 13 May 2014 applied a surcharge which took effect for the tax years from 1 July 2014 to 30 June 2017. This increased the FTD rate to 49% for a period of 3 years commencing 1 July 2014.
A proposed increase of the medicare levy 0.5% from 1 July 2019 (which would have flowed on to the FTD) was abandoned by the government.
Family Trust Distribution Tax
FTD tax is applicable when a distribution is made outside the family group designated by a family trust election.
The term “distribution” has an expanded meaning for this purpose, and includes both capital and income which are defined in sections 272-45 to 272-63 of Schedule 2F to the Income Tax Assessment Act 1936.
Rate of Family Trust Distribution Tax
The rate is set at the top marginal personal tax rate including medicare levy
|Rate of FTD|
|From 1 July 2017||47%|
|From 1 July 2014 to 30 June 2017||49%|
|Up to 30 June 2014||46.5%|
A separate payment advice is required for each distribution of income or capital which attracts an FTD liability, and remittance of the tax to the Tax Office is required to be accompanied by the form Nat 6175.
Payment is generally required within 21 days after the distribution is made, or if the distribution was made before an election form was lodged, 21 days after the election.
See further: Family trust distribution tax.
“Family Trusts”: Some tax rules are simplified
The election to become a Family Trust has the effect of simplifying some of the tax rules which apply specifically to trusts.
Trust Tax Losses
Under the trust loss rules the deductibility of past tax losses depends on satisfying (to the extent relevant in each situation)
- 50% stake test and control tests
- an income injection test – which is designed to prevent income being injected into the trust to absorb losses; and
- a pattern of distributions test – which compares the current year profit distributions against distributions of the previous 6 years
If a family trust election is made, the income injection test is greatly simplified and the other tests generally would not apply.
Dividend franking credits
Unless a family trust election has been made, a non-fixed trust (which includes many unit trusts) is unable to satisfy the 45 day holding period requirement for franking credits to be available on dividends distributed to any trust beneficiaries which are unable to use the small shareholders exemption.
The small shareholder exemption applies to shares acquired by trusts after 31 December 1997 where the beneficiary’s total franking credits entitlement is $5,000 or less in the income year. See guide: You and your shares 2018 (2017).
If a non-fixed trust is the majority shareholder of a company with tax losses or bad debts, a family trust election will enable the trust to be treated as a single entity which thereby simplifies ownership tests for the company’s tax deductions.
Trustee beneficiary reporting rules
From 1 July 2008 trusts with a family trust election in effect need not comply with the trustee beneficiary reporting rules, which require closely held trusts to report distribution entitlements of trustee beneficiaries. Family trusts are treated as “excluded“.
Effect of electing to be a family trust
Electing to be a family trust has the effect of restricting and specifying the trust beneficiaries in order to secure or simplify the claiming of tax losses, debt deductions, franking credits and to avoid the trust beneficiary reporting rules.
The restrictions are supported by a penalty tax at the top personal rate plus medicare on distributions which are made outside the specified family group (family trust distributions tax).
IF..there are no material losses or debt deductions, franking credits are below the small shareholders exemption level and trust beneficiaries are in any event readily named and identifiable – then a family trust or interposed entity election and the associated loss of flexibility may not be warranted.
How it works
Crucial to the family trust election is the nomination of a “test individual” – because it is the related family group of that individual which sets the boundaries of family trust distributions if the FTD tax is to be avoided. All distributions outside the designated family framework (as expanded by interposed entity elections – see below) attract the Family Trust Distribution Tax.
How and when is a family trust election made?
For 2005 and later income years family trust and interposed entity elections can be made at any time, 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 entity passes the family control test, and
- any conferrals of present entitlement or any actual distributions have been made within the designated family group
The election does not have to be made on an approved form, however use of the form published by the tax office (updated annually) can help to ensure that all the relevant information for a valid election is provided.
An election is only required to be made once, however the trustee must confirm the trust’s family trust election status each year via information in the annual tax return.
|Election and Revocation Forms|
|Family Trust Election||Interposed Entity|
Is a family trust election reversible?
A family trust election is revocable where the family trust is a fixed trust and certain other conditions are met.
Also since 1 July 2007 family trust elections can be revoked where the family trust election was not required for utilisation of tax losses, bad debt deductions or accessing franking credits.
Note also that once having revoked a family trust election – no further family trust election can be made.
Entities (companies, partnerships and trusts) in which members of the family group have fixed entitlements are considered to be part of the family group covered by a family trust election. (See Sched 2F Sec 272-90).
ATO Guidance for determining the existence of a fixed entitlement is available in (draft guideline) PCG 2016/16. The draft Guideline outlines the factors that the Commissioner will consider when deciding whether to exercise the discretion to treat an entitlement as being a fixed entitlement, which results in a trust being treated as a fixed trust under the trust loss provisions.
An interposed entity election is required to treat an entity without fixed entitlements as being within the family group of an individual specified in a family trust election. This enables distributions to be made to the entity without exposure to FTD. It will also operate to exclude a trust from having to comply with the trustee beneficiary reporting rules.
This page was last modified 2018-12-25