Family Trust Election (FTE)
An FTE is an election that is made in order to make a trust a “family trust” (FT) for taxation purposes. The election must specify a year of income from which it is to take effect. It must also specify one individual whose family group is to be taken into account.
The purposes of making an FTE
There are five main reasons as to why a trustee may choose to make an FTE.
1. The trust loss measures
The first reason is if the trust has a carry forward loss but cannot satisfy the required trust loss tests. For a non-fixed trust to claim a loss in the absence of making an FTE, the trust would need to satisfy the 50% stake test (if applicable), the pattern of distributions test (if applicable) and the control test and not fail the income injection test, to claim a revenue loss.
By becoming a FT the non-fixed trust is subject to concessional treatment and most of the trust loss measures do not apply, or apply in a modified way.
2. The Company loss tracing measures
This concession applies for the purposes of the company loss recoupment rules (continuity of ownership test) so that where the relevant interests in a company are held by a ‘family trust’, the trustee of the ‘family trust’ will be taken to own the interests as an individual. This may be of particular importance when a non-fixed trust owns a majority share in a loss company.
3. The Franking Credit Trading Measures
In the absence of a trustee of a non-fixed trust making an FTE, a beneficiary with no fixed entitlements will not be a ‘qualified person’ for the purposes of the 45 day rule. This rule generally denies beneficiaries of non-fixed trusts the franking rebate and franking benefits, in relation to dividends paid on shares that were acquired after 3pm on 31 December 1997.
4. Trustee Beneficiary Reporting Rules
The rules broadly require that the trustee beneficiaries receiving any distribution provide their TFN or ABN to the distributing trust. Failure to do so will require the distributing trust to withhold tax at the rate of 46.5%. Family trusts are not required to comply with these rules.
5. Accessing the Small Business Restructure Rollover
The SBRR allows Small Business Entities to restructure their business by transferring business assets to another related entity. For business assets to be transferred to a related Trust, one of the requirements is that the Trust must be a Family Trust.
Requirements in order to be able to make a current year FTE
In order for a valid FTE to be in place, the following requirements must be met when making the FTE:
- The election must be in writing; and
- The election must specify an individual whose family group is to be taken into account; and
- The trust must pass the family control test at the end of the specified income year.
Trusts can make FTE’s at any time in relation to earlier years provided certain conditions are met.
These conditions require 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 (i.e. for a 2024 tax return up to 30 June 2023):
- the entity passes the family control test, and
- any conferral of present entitlement or any actual distributions of income or capital during that period have been made to the specified individual or members of that individual’s family group.
Note the election must still be in writing and will still need to specify an individual whose family group is to be taken into account.
The test individual (or specified individual)
The test individual is the starting point to determine which beneficiaries in the future will be included in the ‘family group’ and thus be able to receive distributions from the family trust without the trustee of the trust becoming liable to pay family trust distributions tax (see below) on the distribution.
As such, it is very important to choose the right person when making the election.
The defined Family Group is therefore:
- the individual (the test individual) specified in the family trust election;
- a member of the primary individual’s family or the primary individual’s spouse in the following list:
- a parent;
- grandparent;
- brother or sister;
- child;
- a nephew, niece;
- any lineal descendant of a nephew, niece or child referred to above;
- the spouse of the test individual, and a spouse of any of those listed above;
- certain former family members.
Once the test individual is chosen and the FTE is lodged, any distributions in the future will need to be carefully monitored to ensure that distributions are made only to the test individual and his/her Family Group. If a distribution goes to a non-Family Group member, then family trust distribution tax will be applied to the trustee at the top marginal tax rate.
If you have any queries on the above, please contact Sean Pearce or Chris Schoeman.