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  • Family trusts – concessions

    A family trust for tax purposes is one whose trustee has made a valid family trust election. It is not sufficient to simply include the words 'family trust' in your trust's name. A trustee only makes a valid family trust election where they have satisfied the relevant tests, and made an election in writing in the approved form. Once the family trust election (FTE) 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 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 lodgement 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 including by moving 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.

    Find out about:

    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.

    An FTE can be made at any time. It 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.

    Example: FTE reversing FTDT liability

    For example, the trustee of Trust A (which has an FTE in force) distributes $50,000 to the trustee of Trust B in the 2014–15 income year. Trust B is not a member of Trust A's family group, nor has Trust B made an FTE or IEE. Consequently, the trustee of Trust A becomes liable to pay FTDT on the $50,000 distribution to Trust B.

    In the 2015–16 income year, the trustee of Trust B makes an FTE specifying that the trust be treated as a family trust at all times from the beginning of the 2013–14 income year. The FTE specifies the same individual named in the FTE of Trust A resulting in Trust B becoming part of the specified individual's family group.

    As Trust B has a FTE in force from 1 July 2013, it is treated as having been a member of the family group in relation to the $50,000 distribution made by the trustee of Trust A in the 2014–15 income year. Therefore, there is no FTDT liability for the trustee of Trust A.

    The effect of making an FTE that is in force from an earlier year can extend beyond reversing an FTDT liability – it also can allow access to the tax concessions for family trusts listed above.

    However, whilst an election can operate to reverse a FTDT liability incurred in the 2004–05 or subsequent income year, the ordinary amendment periods limit access to the tax concessions to income years within the applicable amendment period. That is, any retrospective access to the tax concessions is usually limited to either two or four years.

    2004 or earlier income years

    FTEs for the 2004 or earlier income years could only achieve the above result by lodging in accordance with Practice Statement PS LA 2004/1 (GA) (Withdrawn). Prior to that practice statement, subject to certain transitional rules, FTEs could only be made for the earliest year for which a tax return had not yet been lodged. In particular, the election could not be made for the specified income year if it was made after the entity's return for that year has been lodged.

    See also:

    The individual specified in the election

    An FTE must specify a person as the individual whose family group is to be taken into account in relation to the election (referred to as the specified individual, primary individual or test individual throughout Schedule 2F).

    The specified individual has no additional rights or responsibilities and doesn't even need to be directly associated with the trust.

    Only one individual can be specified in an FTE.

    Where an FTE is being made in respect of an earlier year of income, the specified individual's date of birth must be on or before the beginning of the income year specified for the commencement of the FTE.

    The specified individual must also be alive at the time the election is made.

    The FTE isn't affected by the death of the individual specified in the FTE – the members of the family group are still determined by reference to that individual.

    FTE revocation

    An FTE can be revoked where the family trust is a fixed trust or where the FTE was not required for recouping tax losses, deducting bad debts or accessing franking credits (subject to the satisfaction of certain conditions).

    Generally, revocations can be made until the end of the fourth income year after the income year that was specified in the original FTE.

    These revocations must be made in the trust’s tax return for the income year from which the revocation is to be effective. If the entity isn't required to lodge a tax return for the income year, the revocation must be given to the ATO within two months of the end of that income year, or such later day as the Commissioner of Taxation allows.

    An FTE can't be made for a trust that has previously had an FTE revoked.

    A tax return that has already been lodged can't be amended to include an FTE revocation.

    FTE variation

    The specified individual can be varied once, but only once, subject to certain conditions, including that both:

    • the new specified individual was a member of the family of the original specified individual at the election commencement time
    • there have been no conferrals of present entitlement, or distributions of income or capital, by the trustee of the family trust or an entity that made an IEE in relation to the trust to parties outside the new specified individual’s family group during the period in which the election has been in force.

    Also, the specified individual can be varied if, as a result of a family law order, agreement or award arising from a marriage or relationship breakdown, the control of the trust passes to the new specified individual and/or members of their family.

    Generally, variations can be made until the end of the fourth income year after the income year that was specified in the original election. Variations must be made in the trust’s tax return for the income year from which the variation is to be effective. If the entity isn't required to lodge a tax return for the income year, the variation must be given to the ATO within two months of the end of the income year, or such later day as the Commissioner of Taxation allows.

    A tax return that has already been lodged can't be amended to include an FTE variation.

    Family control test

    For the purposes of making an FTE or an IEE, a trust passes the family control test (FCT) at a point in time when some or all of the following people control the trust:

    • the individual specified in the relevant FTE
    • members of the specified individual's family
    • a professional legal or financial adviser to the family.

    The FCT looks at, among other things, who can control the application of income or capital of the trust.

    This is why a professional legal or financial adviser might be part of the controlling group of a family trust: the adviser might, for example, be one of the directors of the trustee company. However, a person can only be a controller as a professional legal or financial adviser if they became a controller because of their status as such an adviser, rather than in a personal capacity.

    A company or partnership that proposes to make an IEE passes the FCT at a point in time when some, or all, of the specified individual and members of their family beneficially hold between them, directly or indirectly, fixed entitlements to more than 50% of the income or capital of the company or partnership.

    Because the FCT for companies and partnerships only looks at who beneficially owns interests in the entity, any control influenced by a professional legal or financial adviser isn't relevant to determining whether the family controls a company or partnership.

    Family of the specified individual

    The family of the individual specified in the relevant FTE consists of that person (the test individual) and all of the following (if applicable):

    1. any parent, grandparent, brother or sister of the specified individual or the specified individual's spouse
    2. any nephew, niece or child of the specified individual or the specified individual's spouse
    3. any lineal descendant of a nephew, niece or child referred to in point 2
    4. the spouse of the specified individual or of anyone who is a member of the specified individual's family because of points 1, 2 and 3.

    ‘Any lineal descendant’ includes any descendant (of an individual) in a direct line of relationship flowing downwards. This starts with an individual's child (including an adopted child, stepchild or ex-nuptial child) and extends to include a grandchild, a great-grandchild and so on. They are not restricted to a descendant on either a patriarchal or matriarchal basis.

    A person doesn't cease to be a family member merely because of the death of any other family member.

    The spouse of the deceased specified individual will continue to be a member of the family, provided they were the spouse at the time of death.

    If the individual specified in an FTE is legally married and separated from their spouse, the spouse remains a member of the family. If the specified individual divorces after being legally married, their former spouse won't be a member of the family. However, the former spouse will remain a member of the family group.

    If the spouse of the deceased specified individual or a member of their family becomes the spouse of a person who is not a member of the deceased specified individual’s family, the spouse will cease to be a member of the family. Instead, the former spouse of the deceased specified individual or a member of their family becomes a member of the deceased specified individual’s family group. This means that the former spouse of the deceased specified individual won't have concessionary treatment under the income injection test.

    This diagram shows the ‘family’ that applied from 1 July 2007 as defined in section 272-95 of the Income Tax Assessment Act 1936.

    Family group

    For the purposes of determining whether a conferral or distribution has been made, the following people and entities are generally members of the family group of the individual specified in the FTE:

    • the members of the specified individual’s family
    • former members of the specified individual’s family who are no longer members due to a breakdown in a marriage or relationship, or death (including former spouses, former widows/widowers and former stepchildren)
    • family controlled or owned trusts, companies or partnerships
    • the family trust for which the family trust election has been made
    • other family trusts with the same individual specified in their FTE
    • trusts, companies or partnerships that have made an IEE (see below) to become a member of the specified individual’s family
    • trusts, companies or partnerships (other than non-fixed trusts) where certain members of the family group have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the trust, company or partnership
    • deductible gift recipients in Australia
    • bodies all of whose income is exempt from income tax.

    Interposed entity elections

    There are two main reasons to make an interposed entity election (IEE):

    • To make an entity a member of the family group of the individual specified in an FTE. This means that the trustee of the family trust can confer present entitlement to, or make distributions of, income or capital of the family trust on or to the entity that made the IEE without the trustee becoming liable for FTDT.
    • To exclude a trust from having to comply with the trustee beneficiary reporting rules in Division 6D of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

    An IEE can be made in respect of a trust that has an FTE in force. The interposed entity (company, partnership or trust) 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, both:

    • the company, partnership or trust passes the family control test
    • any conferrals of present entitlement to income or capital of the trust during the period, or actual distributions of such amounts, have been made on or to the individual specified in the FTE or members of that individual’s family group.

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

    The election commencement time is usually the beginning of the specified day in the IEE. However, if the FCT is not passed for the whole of the specified income year, the election commencement time is the earliest time from which the company, partnership or trust passes the FCT continuously for the remainder of the income year.

    The death of an individual specified in an FTE of a family trust does not prevent any other trust, company or partnership from making an interposed entity election (IEE) to be included in that individual's family group.

    A company, partnership or trust may make more than one IEE provided each family trust in respect of which the entity is making the IEE has the same individual specified in its FTE. A family trust can make an IEE to be included in the family group of an individual who is different from the person specified in the trust's FTE.

    A superannuation fund may make an IEE provided it passes the FCT.

    As with an FTE, an IEE may commence from an earlier income year to bring the entity within the family group of the specified individual. This enables the entity to access the corresponding benefits of being in the family group from the earlier income year, providing the IEE can be validly made.

    For example, Trust A (which has an FTE specifying Mike) distributes $50,000 to Jones Pty Ltd in the 2014 income year. Jones Pty Ltd has not made an IEE to be included in Mike's family group and is not otherwise a member of that family group. The trustee of Trust A is liable to pay FTDT on the distribution to Jones Pty Ltd.

    In the 2015 income year, Jones Pty Ltd makes an IEE to become a member of Mike's family group. The election identifies 2013 as the specified income year. As Jones Pty Ltd has an IEE in force at the time of the 2014 distribution, the trustee of Trust A is not liable to FTDT.

    These rules apply to IEEs specifying the 2005 and later income years.

    See also:

    IEE revocation

    An IEE can be revoked where an entity was at the election commencement time, or becomes at a later time, a member of the family group of the specified individual (for instance, where members of the family have fixed entitlements, directly or indirectly, and for their own benefit, to all of the income and capital of the entity or where a family trust has the same specified individual as another family trust in relation to which it makes an IEE).

    In addition to this, an IEE is taken to be automatically revoked if the FTE to which it relates is revoked.

    Generally, revocations can be made until the end of the fourth income year after the income year that was specified in the original election.

    These revocations must be made in the entity’s tax return for the income year from which the revocation is to be effective. If the entity isn't required to lodge a return for the income year, the revocation must be given to the ATO within two months of the end of that income year, or such later day as the Commissioner of Taxation allows.

    A tax return that has already been lodged can't be amended to include an IEE revocation.

    How to make, vary or revoke an FTE or IEE

    An FTE or an IEE must be made in writing and in the approved form.

    We release a form each year for making, varying or revoking an FTE or IEE. While use of these standard forms isn't mandatory, the election must be in writing and contain all the information specified on the form, including a written declaration.

    An FTE can only be made once for a trust. The trustee of a family trust is required to include the income year specified in the FTE on the trust tax return each year while the FTE remains in force. This is the same for companies, partnerships and trusts with IEEs.

    See also:

    Family trust distribution tax

    Family trust distribution tax (FTDT) is payable where:

    • a trustee of a trust has made a FTE
    • a partnership's partners, a company or the trustee of another trust have made an IEE to be included in the family group of the individual specified in the FTE made by the family trust, and
    • the trustee of the FTE trust, the trustee of the IEE trust, the partnership or the company distributes income or capital other than to the specified individual or members of the specified individual's family group.

    FTDT is payable at the top marginal rate of tax applying to individuals plus Medicare levy (currently 49%). It is paid on the amount or value of any such distributions or conferrals made by an electing entity at any time after the election made by the entity becomes effective.

    A reasonable salary, wage or other benefit (such as superannuation contributions or fringe benefits) provided to, or for the benefit of, an employee for work performed is not considered to be a distribution. There is only a distribution, on which a liability to pay FTDT arises, to the extent that it exceeds an amount commensurate with commercial rates for the type of work or services provided by the employee.

    Each payment of FTDT must be accompanied by the Family trust distribution tax payment advice (NAT 6175).

      Last modified: 05 Jul 2017QC 48752